Exclusive: Transcript: Interview with Slovenian DMO Head Marjan Divjak
28 March 2024
By Aurėja Bobelytė – VILNIUS (Econostream) – Following is the full transcript of the interview conducted by Econostream on 26 March 2024 with Marjan Divjak, Director General of the Treasury Directorate of Slovenia’s Ministry of Finance:
Q: What impact on you, if any, will the ECB’s reduction and then termination of PEPP reinvestments have?
A: The ECB's decision to wind down PEPP reinvestments was expected to put pressure on the borrowing costs of most issuers. Nevertheless, the QT announcements had more pronounced implications for less liquid markets. However, the gradual pace of unwinding of the ECB balance sheet, Slovenia's robust credit position and the strategy we are pursuing to balance supply with demand are limiting the impact on Slovenia spreads.
Q: What are the potential implications for you of interest rate cuts starting soon in the Eurozone?
A: The rate cuts are expected to have implications for the level of rates and shapes of the curves, where the important drivers in this context are expected to be the residual inflation over the ECB’s 2% inflation target and the geopolitical and economic situation.
Q: Does the new operating framework of the ECB have any bearing on your issuance operations?
A: The new operating framework of the ECB, according to our current assessment, is not expected to have significant near-term impact on our funding operations.
Q: We see from Slovenia’s budget documents that you can use swaps/derivatives, but is this programme active? Is it done to adjust the desired duration of the debt portfolio at the time of issuance, or done separately? Also, there is the mention of forward starting swaps, are these done to pre-hedge potential issuance in future years?
A: The strategy we are pursuing is above all to hedge foreign currency exposure by swapping foreign currency bond coupon flows to synthetic euro cash flows. In such a way, all the SLOVEN USD-denominated bonds were hedged, including the latest, which the Republic issued last year. The inflation-linked coupons of the inflation-linked bond which the Republic also issued last year were swapped to fixed coupons.
Q: You have 4% of your debt portfolio in USD. What drives that percentage? Is it the cost when it is swapped into EUR, or are you using this debt to widen the investor base for the Slovenian name? If it’s the latter, how well is that working?
A: The Republic of Slovenia during the years 2012 – 2014 issued five USD-denominated bonds and established strong relationship with USD investors. The strategic objective was that Slovenia would maintain a regular presence on the global market. The requirement is that the funding in foreign currency, on a cross-currency basis, be comparable to the funding in euros. This was difficult to achieve during the period when the ECB was performing QE. Nevertheless, Slovenia maintained a presence on the global market, conducting liability management operations, and during 2016 – 2018 bought back 6.3bn of SLOVEN Bonds, i.e. the majority of its outstanding exposure.
In September 2023, the Republic issued a new 10-year USD 1.0bn bond, which was at the time on a cross-currency swap basis indicatively 11bp wider to the EUR SLOREP secondary market. This was effectively the cost of diversification, which the Republic was willing to accept. The strategic commitment is that Slovenia is to appear every third year on the global market, subject to the cost of funding, issuing a benchmark-size bond of 1bn issue size, where liquidity can be added by taps.
Q: What drives bond buybacks? Maturity bubbles in certain years, or do you look at the slope of the yield curve and yield premia to try and reduce funding costs?
A: The main objective is to manage the refinancing risk, taking into the account the requirement outlined in the financing programme that the non-negative net present value (NPV) of such liability management transaction be achieved. The slope of the yield curve is indeed important in the context of liability management, given that it drives the results of the NPV calculations. There are multiple strategic objectives which have been met during the conduct of especially cross-currency liability management work, of which I would mention the enhancement of the liquidity of the key maturity points on the yield curve.
Q: There is very little debt redeeming in 2024 and no bonds in 2025. It’s a nice position to be in, but how will you ensure liquidity of the curve when so little needs to be sold?
A: The funding needs of the Slovenia budget in 2024 and 2025 are estimated between €4 – 4.5bn. This allows benchmark bonds to reach issue size, which, given the size of the market, ensures good secondary market liquidity. It is important to emphasize that we operate advanced metrics measuring performance of market-makers on the secondary market, based on which primary dealers are admitted to the joint lead managers groups for the primary market operations. The securities lending facility, which is an important instrument adding to the secondary market liquidity of the SLOREP market, is offered to dealers. The SLOREP market is, according to the feedback of market participants, considered adequately liquid.
Q: Are you satisfied with the share of foreign investors in your issuance?
A: The ratio of the debt by residence of investors is currently 44% resident (including BoS holdings) to 56% non-residents investors. It is estimated that holdings of non-resident investors in the medium-term is to increase. Because of this, investor work is important. We are maintaining close relationship with investors, and we meet them on a regular basis. There are also other communication channels like regular newsletters, which are being sent out to the international and domestic investor community to update them on the latest developments in Slovenia.
Q: The previously forecasted budget deficit had to be readjusted sharply due mainly to the floods in Slovenia in 2023. Does the significantly higher budget deficit impose challenges for you into 2024?
A: Slovenia has a strong position on capital markets and investors have taken a constructive view of how Slovenia is dealing with the consequences of the floods. From a debt management perspective, it is important that Slovenia also in the years 2024 and 2025 is reducing general government debt as a percentage of GDP.
Q: You said recently that Slovenia is hoping to issue in yen. What is the outlook in this regard?
A: Issuing in yen remains the strategic objective in terms of further investor base diversification. The issuance depends on the cost of funding in yen on a cross-currency basis compared to the cost of funding in euros.
Q: The IMF said that Slovenia needs to take on a stricter fiscal stance to reduce debt and support disinflation. How do you as debt issuer view these recommendations?
A: Debt managers need among all other things to understand fiscal policy, and we also give our recommendations to fiscal policy makers. Having said that, debt management office has its own strategic objectives to fulfil, which are:
- I. to provide a sufficient and timely financing of the central government budget,
- II. to minimize the long-term costs of financing, while maintaining acceptable refinancing, currency, interest rate and other market risks,
- III. to execute the transactions in adherence to market principles,
- IV. to broaden the investor base and to ensure a permanent and steady access to the sources of financing, as well as
- V. to increase liquidity of central government securities and to develop the secondary market of these securities.
Q: How do you assess the outcome of the 13 March 10-year syndication?
A: The objective of the 13 March tap was in addition to execute finding to add to the liquidity of the 10-year on the run benchmark bond issued in January this year to increase the nominal size of the bond to €2.0bn. The market was during the intra-day execution conducive, and the book size exceeded six times the upper range of the tap size. The quality of the book was very good. The objective is further to increase the size of the bond.
Q: What is the status of your intention to use cash reserves to reduce debt? How limited are you in this by the need to be ready in case of external shocks or other unexpected challenges?
A: The general government debt as a percentage of Slovenian GDP is on a steady declining trajectory. Since 2020, when the general government debt increased to 79.8% from 65.6% in 2019, it decreased first to 74.8% of GDP in 2021 and to 72.3% in 2022. For 2023, it is estimated at 69.2% of GDP. The estimated evolution of debt as a percentage of GDP for the medium-term falls within the framework outlined in the Ministry of Finance Medium-Term Strategy on Public Debt Management 2023-2025, which envisages further general government debt reduction as a percentage of GDP. Cash reserves, which are an important risk management tool, can gradually be reduced also to ensure consistent reduction of the general government debt as a percentage of GDP.