Wednesday, April 30, 2008

Romania aims to boost secondary debt market

By Luiza Ilie and Marius Zaharia
BUCHAREST, April 30 (Reuters) - A new Romanian government debt management strategy is likely to boost the country's tiny secondary debt market, a finance and economy ministry official told Reuters in an interview.

Stefan Nanu, director of the finance and economy ministry's treasury department, said the ministry hoped to list treasuries on the Bucharest bourse in September, and it may issue 10- and 15-year leu bonds in late 2008.

Romania fully liberalised its capital markets in 2006, but has next to no secondary debt market, limited issuance of treasury bonds and a small stock exchange. Portfolio investment opportunities remain scarce, and most foreign cash is parked in short-term bank deposits or the property market.

Nanu said the medium term debt strategy, Romania's first, would answer the need for more liquidity and longer maturities.

"The implementation of the strategy will set the premises for a more liquid secondary market since the main instruments we refer to in the strategy are government securities," he said.
"There is a need for more liquid instruments on a broader range of maturities to build a yield curve on a longer timeframe," he said in the interview, conducted on Tuesday.

The strategy, which the ministry published last week and needs cabinet approval, underlines treasuries as the main debt instrument rather than loans from multinational agencies, as in the past.

Longer debt maturities are particularly needed as Romania is overhauling of its outdated state pension system, and private pension funds are hungry for investment opportunities.
"We are considering an alternative secondary debt market by listing government securities on the Bucharest Stock Exchange. In June or July we hope to begin technical tests so that we can float treasuries in September if everything goes well," he said.

The strategy, which the government could approve within a month, envisages issuing bonds of up to 15 years in 2008-2010.

The ministry is also considering issuing inflation-indexed securities, which would benefit pension funds, as well as introducing buy back and bond exchange operations.

So far this year the ministry has focused on short-term instruments because the market has pushed for higher yields. This is due to resurgent inflation and exchange rate volatility caused by the global liquidity squeeze.

It has sold a little over 3 billion lei so far in six and 12-month bills, and 3 and 5-year bonds.
The ministry, which has raised its 2008 local issuance plans to 11 billion lei from roughly 9.5 billion sold last year, has rejected bids repeatedly in recent months. Accepted yields have jumped above the central bank's benchmark rate of 9.5 percent.

"Given current conditions, with growing interbank rates and high inflationary expectations, we are looking at short- and medium-term financing, nothing over five years," Nanu said.
However, he said the ministry may resume its longer term issuance plans later this year if inflation returned towards the central bank's 5.9 percent December forecast and if private pension funds step up demand for treasuries.

"The 15-year bond depends on how the 10-year bond does. Therefore the 10-year bond will be most likely in the fourth quarter. We could issue the 15-year bond this year as well ... and reopen it several times next year to make it liquid."

Potential changes in debt issues' size would appear in the second half of 2008, depending partly on whether Romania issues a eurobond worth at least 500 million euros and carrying a 10-year maturity. A previous eurobond matures in the summer.

"We are not forced to issue the eurobond by June. We also have the alternative to use funds from privatisations to repay the eurobond that matures," Nanu said. (Editing by David Stamp)

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