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INVL Asset Management: New 30-year Lithuanian government bond is another step to lock in historically low debt servicing costs

Lithuania last Friday borrowed EUR 1.3 billion in the international bond market through two new Eurobond issues with maturities of 10 and 30 years and denominated in euros. The yields on the issues at launch were 1.129 per cent and 2.188 per cent, respectively. The 30-year bond stands out as Lithuania’s longest-maturity Eurobond issue ever.

“The Finance Ministry’s decision to borrow for a longer period, namely 10 and 30 years, is one more successful step to take advantage of the still extremely favourable situation in the bond market and the historically low interest rate environment. Over the past 5 years, the Lithuanian government has managed to reduce debt servicing costs in both absolute and relative terms despite a higher level of debt and longer residual debt maturities,” said Karolis Kybartas, a Fixed Income Fund Manager at INVL Asset Management.

Lithuania’s public sector debt at the end of 2016 stood at EUR 15.5 billion, according to Statistics Department of Lithuania. The majority of that, about EUR 14.6 billion, was central government debt. Debts of municipalities and the State Social Insurance Fund to external creditors totalled EUR 655 million and EUR 300 million, respectively. It should be noted that the social insurance fund’s overall debt was EUR 3.9 billion, but most of that consisted of internal obligations to the Lithuanian government.

Over the last 5 years, the absolute size of Lithuania’s central government debt has grown from EUR 12.3 billion to EUR 14.6 billion, i.e., by 19 per cent.

Relative to GDP, central government debt increased by 1.1 percentage points: from 36.8 per cent of GDP to 37.9 per cent.

Meanwhile, Bloomberg data show Lithuanian debt had a weighted average remaining maturity of 6.3 years in 2016. Compared with 2012, that reflects an increase of 1.8 years in the remaining debt maturity.

“Despite the increased level of central government debt and average duration of debt over the past 5 years, debt servicing costs (interest payments) have shrunk significantly both in absolute size and in relative terms. Interest payments to service the central government debt in 2016 totalled EUR 519 million, compared with EUR 639 million in 2012, i.e., they decreased by 19 per cent. Relative to the size of the central government debt, interest payments fell from 5.2 per cent to 3.6 per cent. True, these figures do not include currency hedging income/expenses. It’s no wonder the significant reduction of debt servicing costs contributed in part to the fact that, according to Statistics Department of Lithuania data, the country achieved a public finance surplus in 2016 for the first time since it re-established independence,” the bond fund manager said.

The ECB is continuing its policy of monetary stimulus, though talk of its inevitable end is increasingly heard in the market.

In Karolis Kybartas’s view, in the current situation it makes sense and is appropriate for the Finance Ministry to continue extending the average duration of Lithuanian government debt. At the same time, that should be done without significantly increasing the level of state debt, since there is always a risk the debt will have to be refinanced in the future at considerably higher interest rates, and that might negatively impact the country’s fiscal sustainability.

INVL Asset Management is the only investment management company in Lithuania that manages bond mutual funds. The company currently offers two bond funds for clients: the INVL Emerging Europe Bond Fund and the INVL Global Emerging Markets Bond Fund.

For more information, contact:
Ieva Dunajevaitė-Narmontienė
Head of Communication, INVL Asset Management
Tel.: +370 610 345 77,
E-mail: [email protected]