Dritan Abazović’s government should make a decision by the end of June whether to exit the hedging arrangement for the highway loan or continue with it. The loan for the highway was contracted in 2014 with the Chinese Exim Bank in dollars, and the loan is hedged in half in 2021, from when the installments are paid at an interest rate of 0.88% in euros, instead of in dollars at an interest rate of two percent.
The hedging arrangement was contracted with four banks for 14 years, with the conditions with the banks being reviewed after two years. At the session on Thursday, the government considered the information on the hedging arrangement concluded in July 2021, with an analysis of the possibilities related to the further implementation of the arrangement. The information is of an internal nature, so it was discussed in the closed part of the session.
Several sources close to the Government have unofficially confirmed to Dan that the mandatory two-year period will soon expire and that a decision should be made whether to continue with the arrangement or withdraw from it. They also said that the Ministry of Finance communicates intensively with the banks, but that the contract specifies strict internal procedures, which is why they are not allowed to give any information until a decision is made and the procedure with the banks is completed.
Exiting the hedging arrangement would most likely mean returning to the original conditions with currency risk, given that the loan was taken in dollars. Dan was unable to find out whether the Government could withdraw a certain part of the funds by exiting the arrangement, but one of the sources, who is familiar with the hedging arrangement, said that at one point the Government could withdraw several tens of millions of euros and exit the hedging arrangements. However, they were unable to verify this information. The government should make a decision based on the proposal of the Ministry of Finance, headed by Aleksandar Damjanović.
In mid-2021, the Ministry of Finance concluded a hedging arrangement with four banks: Goldman Sachs, Merrill Lynch, Societe Generale and Deutsche Bank. After concluding the hedging arrangement, Montenegro paid loan installments at an interest rate of 0.88%, while, if it had not done so, it would have had to pay installments in dollars at an interest rate of two percent. For the first three installments paid to Exim Bank, the savings amounted to EUR 18 million.
Montenegro contracted a loan with the Chinese Exim Bank at the end of 2014 in the amount of 944 million USD, which was then worth around 685 million EUR. The contract for the construction of the highway was worth 809.6 million euros, and it was then agreed that 85% of the amount would be paid from the loan, and the remaining 15% from the budget. The loan repayment term is 20 years, and the grace period was six years, i.e. until the middle of 2021. The Ministry of Finance, headed by Milojko Spajić at the time, hedged the loan before paying the first installment.
Since 2014, the exchange rate between the dollar and the euro has been changing, so the contracted price for the construction of the highway was increased by more than 100 million USD at one point due to the rise of the dollar.
The non-governmental organization Action for Human Rights previously announced that, according to data provided by the ministry, the hedging contract is worth USD 818 million, although the total loan is USD 944 million. They then specified that the state concluded a hedging arrangement with the American bank Goldman Sachs in the amount of 175 million, Merrill Lynch in the amount of 314.6 million, Societe Generale Bank in the amount of 210 million and Deutsche Bank in the amount of 118.3 million EUR. Even after the conclusion of the hedging arrangement, the creditor is still the Chinese Exim Bank.
