TIRANA, Oct. 24 – The cut in the key rate to a new historic low of 1 percent last June has made Albania’s internal borrowing much cheaper triggering a slightly faster downward trend in government security yields.
Bank of Albania data shows yields on 12-month T-bills, the government’s key instrument for internal borrowing, dropped to a ten-month low of 1.6 percent in this week’s auction, on a constant downward trend after climbing to 2.77 late December 2017.
Yields on 12-month T-bill hit a historic low of 1.24 percent in mid-2016 soon after the central bank cut the key rate to a then all-time low of 1.25 percent before climbing to 3.22 percent in late December 2016.
The new downward trend has been fuelled by a new cut in the key rate and ample liquidity by commercial banks amid sluggish lending as well as increased household interest to invest in government securities due to much more favorable return rates compared to traditional bank deposits rates of close to zero.
Yields on 12-month T-bills have dropped by 0.56 percent since late May, soon before the new cut to the key rate that was also fuelled by concerns over disinflationary pressure due to euro’s free fall making imports much cheaper and delaying the central bank target of achieving the 3 percent inflation target, estimated to have a positive effect on the slowly recovering Albanian economy.
Yields were already on a downward trend before the early June 2018 cut in the key interest rate, having fallen by 0.54 percent from late December 2017 to late May 2018.
Meanwhile, yields on 2-year notes, the government’s key instrument for long-term debt in the domestic market, slightly dropped to 2.15 percent in this week’s auction, down from 3.25 percent in late December 2017.
Yields on 2-year notes have been on an upward trend after hitting a historic low of 1.5 percent in mid-2016.
In a bid to extend the maturity of the country’s internal public debt, the Albanian government also borrowed considerable amounts of about 31 billion lek (€247 mln) in 3, 5 and 7-year bonds this year.
More than a third of Albania’s domestic debt is short-term, mainly in 12-month T-bills, placing the government at funding pressure and debt roll-over risk.
In early October 2018, Albania also raised €500 million at a 3.5 percent rate in a new 7-year Eurobond, taking advantage of favorable international market conditions and Europe’s single currency at a 10-year low against the Albanian lek, making loan repayment much cheaper for the Albanian government.
Albania’s public debt officially dropped to a 5-year low of 65.2 percent in the first half of this year, but the national currency having gained about 10 percent against the euro had a key impact on its fall.
The Albanian government targets bringing public debt down to a more affordable 60 percent of the GDP by 2021, but international financial institutions have warned the ruling majority’s ambitious but rather controversial €1 billion public private partnership program risks creating new hidden arrears which if included in the public debt stock could leave it unchanged at about 70 percent of the GDP for the next four years.
Due to lower internal and external rates, public debt servicing, which includes interest payments plus repayment of principal to creditors, cost Albanian taxpayers 3.7 percent of the GDP in 2017, down from an average of 4 percent of the GDP in the previous five years, posing a considerable burden to much-needed investment in priority sectors such as education, health and infrastructure.
Albania’s spending on public debt is much higher compared to regional EU aspirants where public debt levels are at more affordable rates that range from 16.6 percent of the GDP in Kosovo, 36 percent in Bosnia and Herzegovina, 40 percent in Macedonia, 60 percent in Serbia and around 63 percent in Montenegro.
