Exclusive: Transcript of Interview with the Head of Estonian State Treasury Department

29 May 2024

By Aurėja Bobelytė – VILNIUS (Econostream) – Following is the full transcript of the interview conducted by Econostream on 27 May 2024 with Janno Luurmees, who heads the Estonian State Treasury Department: 

Q: What impact on you, if any, will the ECB’s reduction and then termination of PEPP reinvestments have?

A: The market has likely already priced this in to some extent, and we do not anticipate any significant impact on Estonian debt.

Q: What are the potential implications for you of interest rate cuts starting soon in the Eurozone?

A: The average time to the refixing of our debt portfolio is approximately 5 years, which is one of the lowest in the EU. As a result, the interest rate on our portfolio is also expected to decrease relatively faster compared to other countries.

Q: Does the new operating framework of the ECB have any bearing on your issuance operations?

A: Not really, we will continue to issue debt as needed to finance the budget deficit.

Q: How would you assess the €1 billion 10-year bond issued at the beginning of this year?

A: The Eurobond issuance on January 10 was highly successful. It was oversubscribed by 7.2 times and was priced flat to fair value at Mid-Swap +70bps, indicating that investors were willing to purchase the bonds without a premium for the new issue. The final order book exceeded €7.2 billion from 180 individual investors.

Q: Are you satisfied with the share of foreign demand for Estonian government debt?

A: The majority of the demand comes from foreign investors, with the share of local investors remaining relatively low so far. We are pleased with the substantial oversubscription of our bond issues, which demonstrates the trust foreign investors have in our country. Of course, we will continue our efforts to engage with investors to support and diversify demand.

Q: The Bank of Estonia has warned about a potential debt spiral if the budget won’t be balanced. How do you view this? Do you think this is worrisome?

A: A new coalition government took office in April 2023, with the sustainability of public finances as a key objective. To address the projected budget deficits in the coming years, the government plans to implement various revenue measures and expenditure reviews. The main revenue measures include raising the VAT in 2024 and income tax in 2025, along with the introduction of several new taxes. Additionally, the government aims to reduce the deficit through budget revisions starting in 2025, involving cost-cutting measures. The government is also considering a negative supplementary budget for this year.

Despite these challenges, Estonia's debt level is expected to remain one of the lowest, if not the lowest, in Europe over the next 4-5 years. However, this does not mean that the government should refrain from taking action today. We hope that the government remains committed to its objectives and that the planned measures will reduce the estimated budget deficit in the coming years, ensuring the sustainability of public finances in the long run.

Q: The Estonian Ministry of Finance has said that the state budget deficit will be increasing this and next year. What kind of implications and challenges does that pose to the debt management programme?

A: On April 30, 2024, the Ministry of Finance published its National Stability Programme 2024, along with forecasts for 2024-2028. The forecast indicates a general government budget deficit of €1.4 billion (3.5% of GDP) in 2024, continuing the trend from the previous year (2023: 3.4% of GDP). However, next year the budget deficit is expected to subside to 3.0% of GDP, aligning with the EU deficit rule. Estonia's central government debt to GDP level is one of the lowest in the EU, currently around 18% of projected 2024 GDP. So, we remain an infrequent borrower with relatively small issuance amounts, and this will not change if the deficit remains around 3% of GDP. We will adjust our issuance plans according to the size of the budget deficit, whether it is slightly smaller or larger. We anticipate continued strong demand from investors despite the somewhat higher deficit. Overall, our debt level remains the lowest in the EU, providing us with substantial flexibility, at least in the short term.

Q: There have also been talks and suggestions of retail issuance to be used to invest in Estonia’s defence. It was also said earlier that you will issue bonds to retail investors this year. Are there any specific plans or expectations about this issue as of now?

A: We are currently preparing documentation to issue bonds on the local market, aiming to make government bonds more accessible to local retail investors. While this process takes some time, we expect to be ready to test the local market later this year, subject to market conditions.

Q: How do you view the results of the latest issuance of €250 million T-bills via auction?

A: Our last T-bill auction on April 2 was successful – seven dealers out of eight participated, the pricing met our expectations, and the total volume of bids exceeded one billion euros. We are also observing growing interest from foreign investors.

Q: Could you say anything about further issuance plans in 2024?

A: We likely do not need to issue Eurobonds for the remainder of this year. However, we plan to hold one more T-bill auction in the fall. Additionally, our Euro-Commercial Paper Programme has taken off and has seen substantial growth this year. We will continue to roll over these volumes. Lastly, as mentioned earlier, we plan a local bond issuance later this year, subject to market conditions.

Q: What do high deficits in other European countries, for example, in France, mean in terms of competition for investors, if anything?

A: It seems that this does not impact investor appetite for Estonian government bonds. Our strong Eurobond issue results in January were achieved in an all-time record week at that time for the sovereign, corporate and national agency bond market, with nearly €72 billion raised in 21 deals. Compared to the second week of January 2023, volumes increased by as much as 85%. More than half of the fundraising demand (56%) came from countries that also set new records – for example, Belgium and Spain achieved their highest-ever bids of €72 and €137 billion, respectively.

Q: Estonia, along with the Baltic countries, is a big supporter of Ukraine. If the US would suddenly stop supporting Ukraine, leading to a Russian victory, what implications would that have for the demand of Estonian government bonds?

A: Yes, Estonia is one of the biggest supporters of Ukraine in terms of percentage of GDP. In April, the US approved the next aid package for Ukraine, sending a strong message of support. We believe that Western allies will continue to provide all possible assistance to Ukraine until the war is won, making a Russian victory very unlikely. After the war started, investor demand for Estonian and other Eastern European government bonds declined in 2022. However, it has since recovered to previous levels, as evidenced by the 7.2 times oversubscription of our last benchmark bond. Regardless of the situation, Estonia is a member of the EU and NATO, which investors view as significant security guarantees.

Q: Conversely, would you expect a Ukrainian victory to make the sovereign debt of Estonia more attractive?

A: As mentioned above, we have already seen investor demand for Estonian government debt recover to pre-war levels. However, we anticipate that pricing will become more favourable for several European governments, including ours, if geopolitical tensions subside and the general environment is perceived as less risky.

Q: The US presidential election is coming up, and a lot of concerns have risen that Donald Trump will win this election. If it were the case, would Trump’s victory prompt any reaction from you in terms of strategy or funding schedule? 

A: No, this in itself would not change our strategy or funding schedule, which is based on our financing needs. However, some (hopefully short-term) market volatility can be expected.

Q: What long-term challenges do you see for Estonian public finances? Are you concerned about them and the attractiveness of Estonian public debt?

A: First and foremost, we need to bring the budget deficit onto a sustainable path. While we are not facing any serious problems for the next 4-5 years, politicians must make several unpopular decisions to return to a more conservative fiscal policy in the long run. As long as the government remains committed to this goal, Estonian public finances will remain sound, and the country's debt level will continue to be one of the lowest in the EU as a percentage of GDP.