Transcript: Interview with Cyprus DMO Senior Economic Officer Stelios Leonidou

24 February 2025

By Marta Vilar – MADRID (Econostream) – Following is the full transcript of the interview conducted by Econostream on 19 February 2025 with Stelios Leonidou, Senior Economic Officer at the Cypriot Public Debt Management Office.

Q: Your gross financing needs are expected to be limited in 2025 to around €1.1 billion. How do you expect to distribute your issuance?

A: We will continue with the strategy we have delivered in the last few years, where we issue a benchmark euro bond of between €750 million and €1 billion, depending on what works best for us. The strategy remains the same. As you mentioned, we have relatively small funding requirements. So, there's a limited number of things we can do.

Q: So, one benchmark issuance and the rest will probably be issued in bills, right?

A: Either bills or perhaps a domestic bond. Whatever it is, it will be done to top up in case we need something extra apart from the euro bond. But it will be very small in relation to the benchmark issuance.

Q: Which part of the curve is now attracting more investor demand?

A: The tenors between 7 and 15 years are usually the part of the curve that gets the most interest. The 2034 bond, the maturity of which is practically 9 years, seems to be the one that's more actively sought by investors.

Q: Do you expect to reopen this bond anytime soon?

A: It is one of the considerations, but these things have not been decided. Our policy is that we look at it very carefully and see what the options are. Final decisions are usually made very close to the issuance.

Q: You also recently made early repayments of some of your bonds. Are you planning any more?

A: We are definitely looking at it as an option, as our funding requirements are small. So, it might be one of the ways we have to increase our funding requirements, but it would also allow us to provide a bit more liquidity to a couple of our bonds. This is definitely a strategy that we will maintain as long as it is useful for us, but always on a case-by-case basis and if markets are amenable to it.

Q: Which type of bonds could be eligible for these early repayments?

A: We usually do this with the euro bonds. We target what we feel is more appropriate for us. Depending on our strategic goals, it can be either off-the-run bonds that are not of much interest to investors or some bonds that we want to target to create increased liquidity to deliver bigger issuances. Those are the kind of targets we are looking for.

Q: Last year some investment firms welcomed the flexibility seen in your 7-year bond issuance. Do you think that this flexibility will continue to characterise your issuances this year? And which kind of issuance could be more flexible?

A: Since we are a small issuer, we try to be flexible in our decisions in order to accommodate market demand. If that is what they mean by flexibility, then yes, we will continue to be flexible. We will look at other options like buybacks or switches, which we have done in the past in order both to help the market, but also to make our curve more functional than it is right now.

Q: You have been receiving a steady series of rating upgrades since 2023. Fitch, for example, upgraded you first from BBB- to BBB, then to BBB+, and then to A-. Why was this?

A: The upgrade path has been continuous since 2014, when we started showing that we were going to get out of the crisis a lot quicker and a lot smoother than expected. Now, in the last few years, we've seen a quicker pace of upgrades. I think this is because of all the global events the economy has gone through since 2020: COVID, the Ukraine-Russia war, the Middle East crisis… Rating agencies were then expecting negative effects for Cyprus, which actually did not materialise or were a lot less significant than expected, like COVID. So, in this regard, there was a delay. Nobody was giving upgrades in 2020-2022. So, this helped with the quicker pace. This is why we saw a lot of them coming in the last few years. However, the overperformance of the economy has also been significant since 2021. We have been outperforming all projections, both our own and those from international organisations and rating agencies.

Q: Do you expect that boost in the economy above expectations to continue and therefore to allow you to keep getting more upgrades in your rating?

A: Our projections so far continue to show strong growth, higher than the average European growth in the last few years. But also continuing surpluses, which means that public debt will continue to go down and the economy will grow healthily. So, we do expect further upgrades. Of course, as you go up the ladder, the time between each upgrade increases. So, the pace will be slower, but we think we have all the possibilities to continue with this upward path. Of course, global volatility seen now and in the last two or three years could change that without it being our fault.

Q: Your latest upgrade, by Fitch, was only a couple of months ago, in December. You have delivered a couple of bill auctions since then. What has been the impact of that upgrade in terms of demand and financing costs in these auctions?

A: Bills are domestic instruments, and the domestic market does not move as much on rating decisions. Fitch was the last one to upgrade our rating in this cycle. I believe the markets had already priced in a lot of the effects. We did see a reduction in yields in our treasury bills. However, I would think that the ECB monetary policy was the main factor there rather than the upgrades.

Q: Would we see any impact of these upgrades in terms of demand and financing costs in your benchmark issuance this year?

A: I think demand will be varied as we go up and now that we have reached the A's. A new set of investors will open up, so I would expect to see a bit more demand coming from different sections of the investor base than what we had until now. On yields, in general, we expect lower costs. But again, I would say the major factor is ECB monetary policy. But getting rating upgrades definitely reduces costs. So yes, there will be a positive effect. Especially if this continues.

Q: Could you give us a hint as to what to expect in terms of of this year's benchmark issuance?

A: The benchmark bond will be anywhere between €750 million and €1 billion, euro-denominated. The tenor has not been decided yet, but we are looking at the 5- to 20-year tenors to see what works better for us in terms of our maturity profile, cost and strategy. We haven't issued anything above 10 years for some time. So, we are interested to see what the situation is over there. But I cannot go into further detail.

Q: What would make you go for the lower or the upper part of the range in terms of size and in terms of the tenor?

A: The size of the bond will be affected mainly by the size of the funding requirements. If they are lower than what was expected, as was the case in the last two years, we might not have room to issue €1 billion. In that situation we would perhaps look into a few switches or something like that. In terms of the alternatives that are out there, we are also looking at the domestic market. If there is enough demand with good conditions in the domestic market, we might also use that tool as well. It really depends, as I said, on the size of the funding needs and the possible other alternatives. Regarding the tenor, beyond costs we are also looking at demand from investors. If we see that there is very strong demand for one particular part of the curve, then we will we look at that very carefully.

Q: Is there any deadline as to when you are going to deliver this benchmark issuance? Last year and the previous one, you did it in Q2. Are you expecting it to happen in Q2 again?

A: We cannot give a lot of details. What I can say is that we are in an extremely comfortable situation regarding our liquid assets, our reserves. We would be able to fund our needs without an issuance well into 2026. So, we have the opportunity to choose any one particular time this year and we will decide which is the best possible time for us to do so. This could be in Q2 but also in Q3.

Q: But not Q4? Are you ruling it out?

A: It could be Q4, but it is the end of the year, so you never know exactly what is happening and everybody has more or less taken their positions. In the past we have done issuances in Q4, but it is not always the prime choice.

Q: Is there any chance that you might have the sustainability bond market anytime soon? [WHAT DOES THIS MEAN? ‘HAVE THE SUSTAINABILITY BOND MARKET’?]

A: I would not say that this would be the case. Definitely not in 2025 and most likely not in 2026 either.

Q: Your sovereign yield curve was extended up to 30-year tenor a few years ago. Do you envision the Cypriot DMO reopening this bond anytime in the next few years?

A: It depends really on the situation and costs. Currently it's trading significantly below par, so it doesn't make a lot of sense to reopen it. But in a case where there is demand and prices are at a level with which we are comfortable, we would like to reopen it because it's significant for us to have a yield curve that extends as much as possible.

Q: On the domestic market, you said in your medium-term public debt management strategy that priority would be given to the issuance of ten retail bonds to individuals for a period of six years on a quarterly basis. When should we expect these issuances to take place?

A: We have a set programme with four insurances per year, for €10 million each issuance. These issuances are set up for March, July, October and December. And I assume the same will be true for 2026 as well.

Q: How's demand going in these retail bonds?

A: There is demand. We're doing the first one right now, and it seems that it will be very close to being completely subscribed. In the last few years, demand was not as big because as interest rates rose, banking deposit rates increased, and that was a rival product. Now banking interest rates have gone down again, so people are interested in it. There is enough demand, and it's really geared towards smaller investors to give them another alternative. It's not so much a financing instrument for us.

Q: You don't seem to have any plans to deliver any issuances in the foreign currency market. What would make you change your mind?

A: This issue is complicated. I keep referring to us as a small issuer because it affects a lot of our strategic options. We would like to do it at some point, in order to tap other markets as well. However, it needs to be appropriate regarding costs, the relative interest rates, and how we expect these relative interest rates to move in the future, as well as other benefits that could come in. However, there is the issue of cannibalising our euro issues. And we don't really have any demand for foreign currency that we could cover with such an issuance. So, this is something that we are looking at and it could materialise, but not in the current environment, not in the next two or three years. The numbers are just not there.

Q: Are you satisfied with the current share of domestic and international investors in your investor base?

A: Our investor base is relatively diversified and solid enough for us to be able to fund ourselves comfortably. In the last few issuances, we've had record order books, both from international and domestic investors. For us, this is a strategic aspect of our issuances, and we do not allow ourselves to be satisfied with the current investor base being enough. We are looking at ways to increase the domestic base and perhaps tap other geographic areas like the Middle East or Asia where we don't have a significant market and where we feel we could provide a good product. We feel that the investor base is solid, but we are always looking to improve that.

Q: You already mentioned that the ECB's current easing cycle is having an impact on your issuance. Have you estimated how big the impact has been in terms of financing costs?

A: I can't say we've put the figures down, but I could say that since rates started to go down last year we've seen a proportionate reduction in our costs. Now, considering that almost all of our marketable debt is in fixed rates, it only impacts new issuances, which are a relatively small part of it. So, it definitely has reduced cost for new issuances, but overall it has not had an impact.