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 2020, the approved limit for short- and long-term debt obligations is EUR 5 billion, of which Ministry of Finance is allowed to assume new debt up to EUR 3.38 billion. Depending on the liquidity situation Treasury bills are issued under the T-bill programme according to decree no 1.1-4/51 dated 19 March 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 July, the amount of outstanding debt obligations, which consisted of two loans from the European Investment Bank, one loan from Nordic Investment Bank, three Treasury bills and one Eurobond was 1.3 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 and graph 2 illustrates the amount of outstanding debt, annual gross borrowing and debt repayments since 2003. In 2016, the State Treasury refinanced a loan of EUR 385 million from 2012 with a new loan of EUR 385 million from the European Investment Bank.

Graph 1: Liquidity Reserve and outstanding debt
*Data from 31.08.2020

Graph 2: Outstanding debt, annual gross borrowing and debt repayments dated 31.08.2020

List of the State Treasury’s borrowing transactions since 1992 (23.49 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 2010.

Table 1. General government debt

millions EUR

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

General Government

982

1027

1763

1934

2130

2077

2216

2219 2174 2360

1. Central Government

439

485

1195

1254

1375

1351

1508

1462 1439 1608

incl. Ministry of Finance

176

173

554

544

525

507

489

472 454 697

incl. EFSF

0

14

355

458

485

455

455

455 455 452

incl. other

262

299

286

252

366

389

564

536 530 459

2. Local Government

543

542

567

680

755

727

709

757 735 752

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 2019, the Ministry of Finance had EUR 697 million of outstanding debt (29% of total general government debt). Note that the State guarantee of the EFSF’s debt obligations (19% of total general government debt in 2019) 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 3: 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.  

Based on the State’s limited funding needs, it has been more favourable to take long-term investment loans from the European Investment Bank and other IFIs than to issue bonds. EIB and other IFIs loan facilities typically have flexible and favourable terms and conditions, e.g. no fees, a long drawdown period, possibility to choose between different repayment terms up to 25 years, favourable interest rates and rights to make partial or full prepayment.

 

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: 10 September 2020