Debt management

The State Treasury Department of the Ministry of Finance is responsible for the government’s debt management. Parliament sets a maximum outstanding amount of debt obligations when it approves the Annual Budget each year and the Ministry of Finance is allowed to assume short- and long-term debt obligations for the State within the approved limit. In 2021, the approved limit for short- and long-term debt obligations is EUR 8.183 billion, of which Ministry of Finance is allowed to assume new debt up to EUR 5 billion. Depending on the liquidity situation Treasury bills are issued under the T-bill programme according to decree dated 5 November 2020 of the Minister of Finance.

The State’s fiscal policy dictates whether there is a need to borrow or not:

  1. Each year Parliament approves the State Budget, which includes budgeted revenues, expenditures (including investments) and financial transactions.
     
  2. The Ministry of Finance prepares a cash flow forecast based on the approved State Budget. The cash flow forecast shows if there are any borrowing needs.

Debt obligations may be assumed in the form of loans, bonds, overdraft facilities or repo transactions, either domestically or internationally. The maximum term for long-term debt is 50 years. The State Treasury department also manages the financial risks associated with the State’s debt obligations (please see the section on financial risk management).

 

Government debt obligations

For a long time financial reserves have accumulated, and the amount of outstanding debt obligations remained relatively low. At the end of 2019, the liquidity reserve was 1.4 times larger than the amount of outstanding debt obligations. The state’s borrowing needs increased significantly due to extraordinary costs and sharp decrease in tax revenues caused by the outbreak of COVID-19 in the beginning of 2020. At the end of June 2021, the amount of outstanding debt obligations, which consisted of long-term loans (EUR 1.5 billion in total from EIB, NIB, CEB and SURE), one Treasury bill and one Eurobond (EUR 1.9 billion in total) was 2.4 times larger than the liquidity reserve. Although the State Treasury is not active in debt management, it has to be ready to borrow quickly if needed – it has in place several committed credit lines with banks that can quickly be drawn upon in case of need to safeguard the State’s ability to make payments.

Graph 1 compares the Liquidity Reserve and the amount of outstanding debt since 2004.
*Data from 30.06.2021

List of the State Treasury’s borrowing transactions since 1992 (23.73 KB, PDF)

 

Central government and general government debt

Statistics usually compare general government debt levels between countries, rather than central government debt levels. Often the central government is the biggest borrower in a country. However, in Estonia, local government debt obligations form the largest share of general government debt. Table 1 shows the split of general government debt since 2011.

Table 1. General government debt

millions EUR

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

General Government

1027

1763

1934

2130

2077

2174

2174 2127 2372 4952

1. Central Government

485

1195

1254

1375

1351

1465

1416 1391 1619 4076

incl. Ministry of Finance

173

554

544

525

507

489

472 454 697 3172

incl. EFSF

14

355

458

485

455

455

455 455 452 452

incl. other

299

286

252

366

389

521

490 483 470 452

2. Local Government

542

567

680

755

727

710

758 736 754 876

3. Social Security Funds

0

0

0

0

0

0

0 0 0 0

Source: Statistics Estonia, Ministry of Finance of Estonia

At the end of 2020, the Ministry of Finance had EUR 3 172 million of outstanding debt (64% of total general government debt). Note that the State guarantee of the EFSF’s debt obligations (9% of total general government debt in 2020) is, for statistical purposes, also considered to be part of the central government debt. Estonia has not paid any funds to cover its EFSF debt obligations.

Graph 2: Gross General Government debt as % of GDP

Source: Statistics Estonia

 

Principles of Debt Management

As a general principle, the State Treasury borrows when there is an actual funding need and repays debt as soon it is economically viable. However a balance needs to be struck in terms of the timing of borrowing:  on the one hand, borrowing in advance of actual funding needs can be costly because interest must still be paid on loans taken or bonds issued even when the funding is not needed immediately and is simply invested at a lower interest rate as part of the liquidity reserve (so-called ‘negative carry’), while, on the other hand, borrowing in advance secures funding at a known interest rate and mitigates the risk that borrowing is more expensive, or in an extreme situation unobtainable, at the time when the funding is needed.

Generally, borrowing needs stem from the need to fund budget deficits or to refinance maturing debt obligations. When there is a borrowing need, the State Treasury evaluates different borrowing options. The choice between taking a loan or issuing bonds depends, among other things, on the size of the funding gap, repayment schedules, ‘all-in’ costs, and associated financial risks (refinancing risk, interest rate risk).

Debt obligations may be assumed as a loan or by issuing bonds. A loan may be taken from an International Financial Institution (IFI) – for instance, the European Investment Bank (EIB) - or from commercial banks. Bonds may be issued in the domestic financial market in Estonia or in international financial markets.

 

Bonds issued by the Government of Estonia

Estonia has only issued bonds three times since the 1990s:

  • In 1993, tranches totalling 300 million Estonian kroons (EUR 19.2 million) for the merger and recapitalisation of Põhja-Eesti Aktsiapank and Balti Ühispank (two local commercial banks). All tranches were redeemed by 2004.
  • In 2002, an international debut Eurobond issue of EUR 100 million to refinance outstanding foreign currency loans from IFIs and to finance the purchase of radar systems. These bonds matured in 2007.
  • In 2020, an International Eurobond issue of EUR 1.5 billion to cover negative cash flow caused by the outbreak of COVID-19 in the beginning of 2020 and to ensure liquidity. The bonds will mature in June 2030.
Last updated: 12 July 2021