Debt financing of the F-16 fighter jets purchase would not affect the stability of Bulgaria’s public finances

Date created: 19-Aug-2019

In June 2019, two issues of 10.5 and 20-year Bulgarian government bonds were placed with a total nominal value of BGN 300.6 million. Following that, the Ministry of Finance reopened them in July, assuming new domestic debt of BGN 400 million. Thus, the aggregate value of GS issued since the beginning of 2019 amounts to BGN 700.6 million. The government used the funds raised to finance part of the purchase of eight US F-16 fighter jets. An official statement from the Ministry of Defence made it clear that the entire amount of the deal ($ 1.2 billion) was transferred from the Bulgarian side in early August.

The fighter jets purchase necessitated an update of the State Budget for 2019. According to the amendment, the planned consolidated deficit increases from BGN 600 million (0.5% of the projected GDP) to BGN 2.43 billion (2.1% of the projected GDP). The fiscal surplus accumulated by June 2019 amounts to BGN 3 325 million (2.8% of the projected GDP), compared to BGN 1 714 million (1.6% of GDP) in the same prior-year period. The maximum amount of new government debt that can be absorbed in 2019 remains unchanged at BGN 1.0 billion.

Figure 1: Republic of Bulgaria - Government Debt: 2014 - VII 2019

* Data forecast as of the end of July 2019

Source: Ministry of Finance; own calculations

At the end of June 2019, Bulgarian government debt amounted to BGN 21 297.2 million or 18.4% of the projected GDP. Mainly due to regular repayments, the government debt level posted an absolute decrease of BGN 768.4 million compared to the end of 2018, while the debt-to-GDP ratio fell by 2.2 percentage points, accordingly. Adding the bonds issued in July (totalling BGN 400 million), the country's government debt reaches BGN 21 697.2 million which accounts for 18.8% of the projected GDP.

The financing conditions are currently favourable and the new GS issues have attracted great investor interest. With the reopening in July, the average weighted yields on the two maturity segments further declined - from 1.6% to 1.52% for the 20-year bonds and from 0.41% to 0.32% for 10.5-year bonds. Liquidity risk is low as the available funds in the fiscal reserve provide a solid buffer. As of the end of June 2019, the country's fiscal reserve amounted to BGN 11 667.8 million or 10.1% of the projected GDP. The total amount of principal payments on maturing government securities to be covered in the period 2019-2021 is BGN 3 053.6 million. The repayments for 2019, amounting to BGN 912 million, have already been performed. Significantly larger tranches are expected in the period 2022-2024, when three Eurobond issues are maturing.