CASE STUDY Alleviating Funding Pressures and Debt Roll-over Risks in Albania OVERVIEW The 2008 global financial crisis and the subsequent Eurozone crisis considerably slowed the growth and poverty reduction momentum in Albania. Government financing needs in 2015 were very high. A EUR200 million World Bank Guarantee alleviated funding pressure and debt roll-over risk in Albania in a volatile global financial market setting by raising required financing from the private sector at attractive levels. Background Financing Objectives Between 1998 and 2008 Albania was growing at Central government gross financing needs in 6 percent per year. However, the global 2015 amounted to 31 percent of GDP. In addition financial crisis in 2008 and the subsequent to a large budget deficit and sizeable domestic Eurozone crisis significantly impacted the debt obligations, a EUR300 million Eurobond was country, slowing down growth to 1.6 percent in maturing. Meeting the financing needs was a 2012 and 1.4 percent in 2013, as exports, significant challenge for the Government remittances and to some extent foreign direct because demand for longer-term domestic investment (FDI) suffered, in particular from government securities had declined in recent Albania’s close ties to Greece and Italy. months as the largest holder of government securities had started to reduce its risk-weighted Public debt surged from 54.7 percent of GDP in assets in Albania. 2008 to 70.7 percent in 2014. Strengthening public financial management and reducing long-term pressures were thus critical for the Financial Solution Government. In March 2015 the World Bank approved a EUR200 million (US$226.7 million equivalent) Policy-Based Guarantee (PBG) to help the FINANCIAL ADVISORY & BANKING Government of Albania secure the needed Terms & Conditions financing at a reasonable cost. Table 1: Summary of Financial Terms Outcome Effective The PBG helped Albania raise EUR250 million July 27, 2015 Date needed for maturing debt from international Type of IBRD Policy-Based banks. The terms achieved — 10-year maturity Guarantee Guarantee at EURIBOR + 1.3% — were substantially better than available under a non-guaranteed Coverage 80% of principal at maturity instrument. This was in line with Albania’s debt management objectives, which are to meet Amount EUR 250 million the funding needs of the central government, Term 10 years minimize borrowing costs to acceptable levels, and support the development and efficiency of Structure Bullet payment the domestic debt market. The PBG also leveraged the World Bank’s capital by increasing the volume of funding raised. Having met the roll-over with the PBG, and in a more Figure 1: Cost comparison: Albania borrowing with supportive market, Albania issued a standalone and without World Bank guarantee 5-year Eurobond at better than anticipated rates two months later. Government Government bond borrowing from The Development Policy Financing (DPF) without World global lender with allowed the World Bank to help Albania Bank guarantee World Bank strengthen public finance management, guarantee pension and energy sector reforms. It was the second in a series of two programmatic development policy financing operations EURIBOR EURIBOR focusing on a) strengthening public financial + + management to address arrears; and b) tax, 6.50%** 1.7%* pension and energy sector reforms to improve fiscal sustainability. * Including arrangement fees and World Bank fees (40 bps); actual interest rate was fixed for the loan. ** Spread for 10 year bond for Albania as of August, 2015. Policy-Based Guarantees in Other Countries Other European countries that have used World Bank PBGs to access the markets since 2011 include Serbia, Macedonia, and Montenegro. In 2011 a PBG helped Serbia raise EUR292.6 million from a global lender. In 2012 the Former Yugoslav Republic of Macedonia borrowed EUR130 million from a commercial lender supported by a PBG, which extended the maturity of government debt by 50 percent and produced savings of at least 3 percent per annum. In 2013, Macedonia once again used a PBG to raise EUR 250 million, achieving even longer maturities and similar levels of savings. The experience of neighboring Montenegro was also very favorable. The PBG-backed transactions also paved the way for subsequent standalone funding transactions by all three borrowers. Montenegro and Macedonia both issued Eurobonds under very favorable terms after their initial PBG-backed borrowings. Serbia too raised over US$5 billion in the bond market. The World Bank Treasury can explore different financing strategies and options, including guarantee-backed financing for clients. Contact: Miguel Navarro, Head of Banking Products, mnavarromartin@worldbank.org, +1 (202) 458 4722 Photo Credits Front: Albes Fusha / World Bank