Moldova’s government has endorsed and submitted to lawmakers for approval a bill on the planned issuance of MDL13.6bn (€610mn) of government bonds, which the government will use to repay the central bank for emergency aid extended to three troubled banks in 2014-2015.

In March, the government and the National Bank of Moldova (BNM) signed a memorandum of understanding on the conversion of emergency aid extended to three troubled banks into government bonds. The banks received MDL13.6bn (€610mn) of aid - equivalent to 11% of Moldova’s GDP - from the central bank with state guarantees in 2014 and 2015.

The government required lawmakers to review and vote on the bill under emergency procedures. The volume of the bonds will be adjusted if any funds are recovered from the three troubled banks, the government said.

Liquidation procedures have been launched at the three banks - Banca de Economii, Banca Sociala and Unibank.

The bonds will have maturities of between one and 25 years and the coupon was set at 1.4% for maturities of one to nine years and 5.3% for longer maturities. The coupon paid by the government on the bonds was calculated based on the central bank’s inflation targeting policy, under which the monetary authority envisages long-term inflation of 5% p.a., the government explained.

Based on the latest GDP forecast from the ministry of economy, and on the schedule of the maturities and coupons planned by the government, the service of the bonds would account for 0.5% of GDP in 2017-2019.

The bond issue will nearly triple the country’s current domestic debt (6.4% of GDP) and push total public debt to some 37% of GDP. The country’s external debt, some 20.5% of GDP, is financed mainly from international financial institutions at preferential interest rates of around 1%. The domestic debt is financed from bills and bonds with maturities of under three years.

The country’s public debt reached MDL35.35bn at the end of April, or 26.9% of the country’s GDP, up from MDL33.51bn at the end of last year.

	Unit	2010	2011	2012	2013	2014	2015	Apr-16	after-bond
PUBLIC DEBT
Domestic eop	MDL mn	5,305	5,842	6,159	6,676	7,075	7,225	8,407	21,997
Domestic eop	% of GDP	7.4	7.1	7.0	6.6	6.3	5.9	6.4	16.7
Foreign eop	$mn	1,116	1,143	1,246	1,290	1,306	1,337	1,363	1,363
Total eop	MDL mn	18,871	19,227	21,185	23,522	27,470	33,509	35,356	48,936
Total eop	$mn	1,553	1,641	1,756	1,801	1,759	1,705	1,788	4,678
Total eop	€mn	1,172	1,276	1,324	1,309	1,446	1,560	1,576	4,124
Total eop	% of GDP	26.3	23.3	24	23.4	24.5	27.5	26.9	37.2
Source: BNM, IntelliNews

Yields in auctions on the primary market decreased during May, after the central bank cut the monetary policy interest rate from 19.5% to 13% in four steps this year. However, the Treasury has to pay double digit yields on the bonds and bills, and the coupons announced for the MDL13.6bn bonds look not attractive. Sold by the central bank at a discount on the secondary market, they could, however, attract investor interest, paving the way for a more active local capital market.

The yields on the first bills issued in June dropped by 9pp-10pp to around 11% compared to the bills issued in the first auctions in May, at yields of 20%-21%, according to data published by the central bank. The coupon payable on a semi-annual basis on the two-year bond - which is the sole maturity available for Moldovan bonds - is calculated for a yield of 16.25% in June, down from 23.32% in May.

SCHEDULE OF THE BONDS ISSUED BY MOLDOVA'S GOVERNMENT FOR REPAYMENT OF EMERGENCY AID TO BANKS
ISSUE MATURING	Volume	Coupon	Maturity	Payment [coupons plus principal]	NPV payment discounted at 5%
2017	50.0	1.4%	1	681	649
2018	210.0	1.4%	2	840	762
2019	230.0	1.4%	3	857	741
2020	240.0	1.4%	4	864	711
2021	260.0	1.4%	5	881	690
2022	290.0	1.4%	6	907	677
2023	310.0	1.4%	7	923	656
2024	330.0	1.4%	8	939	635
2025	360.0	1.4%	9	964	621
2026	390.0	5.3%	10	989	607
2027	420.0	5.3%	11	998	584
2028	450.0	5.3%	12	1,006	560
2029	490.0	5.3%	13	1,022	542
2030	530.0	5.3%	14	1,036	523
2031	570.0	5.3%	15	1,048	504
2032	620.0	5.3%	16	1,068	489
2033	660.0	5.3%	17	1,075	469
2034	720.0	5.3%	18	1,100	457
2035	780.0	5.3%	19	1,122	444
2036	840.0	5.3%	20	1,141	430
2037	900.0	5.3%	21	1,156	415
2038	980.0	5.3%	22	1,188	406
2039	950.0	5.3%	23	1,107	360
2040	950.0	5.3%	24	1,056	327
2041	1,053.7	5.3%	25	1,110	328
TOTAL	13,584				13,584