Exclusive: Transcript: Interview with Latvian Treasury Head Kaspars Āboliņš

7 June 2024

By Aurėja Bobelytė – VILNIUS (Econostream) – Following is the full transcript of the interview conducted by Econostream on 5 June 2024 with Kaspars Āboliņš, Director of the Latvian State Treasury:

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

A: In our opinion, there should not be a significant impact as the market has already priced in the ECB decision.

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

A: The largest impact is expected to be in the short and medium term of the yield curve. We as debt managers issue not only conventional medium to long term bonds, but also Savings Bonds specially designed for domestic retail investors. The public offer of Savings Bonds includes maturities from short to long term, respectively, when the rate cuts start, we might see effect on shorter tenor Savings Bonds first, as they represent the market rates.

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

A: We do not foresee that changes to the ECB operational framework would impact our issuance plans.

Q: You have been issuing mostly via auctions this year. Are there any plans to place Eurobonds in 2024, like the 10-year Eurobond you placed in July and November 2023?

A: Our financing requirement for 2024 is currently estimated at €3bn. Indeed, we have been quite active in domestic auctions via the Primary dealer system. We re-open (TAP) our outstanding GMTN Notes in auctions, thus improving the liquidity of these bonds. Syndicated transactions in international capital markets are to issue new benchmark size lines. In terms of the syndicated transactions, we just made a strategic step to come back to the USD market and priced $1.250 bn 10-year bond in May 22, 2024. As regards to the remainder of the year, we will continue to raise funding in capital markets, but remain flexible in our borrowing strategy, timing, market and instruments.

Q: How would you assess the success of your issuance of GMTN Notes via auctions so far?

A: The Treasury launched the first TAP of outstanding of GMTN Notes (Eurobonds) in auctions via the Primary Dealer system in October 2020. Since then, we organize auctions on a regular basis, and since 2022 the annual gross amount raised in auctions has exceeded €1 billion a year. In 2024, as of today, the Treasury already successfully raised funding of €1 billion in the auctions, representing continuous strong support from domestic and international investors.

Q: According to initial forecasts, the Treasury is expected to borrow €3 billion this year. How far along are you in reaching this amount?

A: As mentioned before, the total borrowing needs for 2024 are estimated at €3 billion. As of today, we have raised approximately 75% of the necessary funding, but it should be noted that the funding needs may change during the course of the year. Therefore, we always maintain flexibility to respond to the actual needs and the situation.

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

A: The investors' demand for Latvia bonds is driven mainly by the country's creditworthiness, i.e. Latvia`s credit rating. Rating agencies analyse issuers from different aspects, including various risks and prospects. In case if rating agencies include such scenario in the rating, it would potentially have impact on the demand. Currently Latvia`s ratings firmly consolidated in the ‘A’ rating category.

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: As always, we will remain flexible in our borrowing strategy, timing, market and instruments. Funding strategy may change in case there are material changes in Latvia`s credit profile, but we are not sure that results of the US presidential election would impact our credit rating.

Q: What can be expected going forward in terms of green issuance?

A: We acknowledge increasing demand of sustainable and green debt instruments from investors and see ourselves returning with a new sustainable bond in the medium-term, but such issuances are always subject to providing credible and eligible budget expenditures.

Q: Are there any plans to issue bonds in other currencies besides the euro in the future?

A: The euro market is our “home” market, but we are flexible in our borrowing strategy to choose the currency. In May 22 we made a strategic step to be back in USD market and the effective rate (after swap) turned to be lower comparing to EUR cost of funding. We have been monitoring other (niche) markets as well, because there is a potential to diversify the investor base, but such borrowing still should be financially beneficial.

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

A: There are institutional investors and retail investors. Since Latvia joined Eurozone and became an integral part of the single EUR bond market, it is hard to distinguish a precise border between domestic or international investors. For the Treasury it is important that the demand (irrespectively of the geography of investors) remains high and supports borrowing transactions. As regards to the domestic retail investors, we have observed increasing interest for Savings Bonds, especially during 2023. Retail

investors are important from the capital market development point of view, and there is potential to increase domestic retail investor debt in the total debt portfolio.

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

A: We do not see that the budget deficits of other EU countries would impact demand for our bonds. During the previous year the demand for Latvian Eurobonds, and in the last USD bond issue as well, has been high.

Q: What would you consider to be the main challenges for Latvian public finances? How would you address them?

A: We would like to emphasise that the situation in public finances for now is stable, although challenges remain. The general government deficit and debt are below the reference values set in the new EU economic governance framework (3% for the deficit and 60% for the debt). The European Commission’s Spring forecasts also project general government deficits below 3% of GDP in 2024 and 2025. The government is also committed to stabilize the general government debt at average 40% of GDP over the long term, providing for prudent fiscal policy and a buffer for future challenges.

Of course, Latvia faces many challenges in the current geopolitical and economic situation, but strengthening defence capabilities is government's top priority. The government is pursuing this key priority while implementing changes to improve the country's competitiveness and accelerate economic growth. The government is committed to a responsible fiscal policy and any additional expenditure will be financed either within the available fiscal space or through an effective spending review.