Montenegro reduces foreign exchange risk on expensive Chinese road loan

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The first stage of the Bar-Bolyare highway in Montenegro. Photo: Government of Montenegro.

The Montenegrin government on Thursday signed a hedging agreement with three western banks to protect the currency risk of a large Chinese loan taken to finance a major highway.

The Chinese loan for the construction of the first phase of the Bar-Bolyare highway has become a heavy burden on Montenegro’s public finances.

Finance and Social Protection Minister Milojko Spajic said an agreement had been reached with two unnamed US banks and one from France to convert the loan from US dollars to euros.

The ministry told BIRN on Friday that the arrangement means that the dollar loan Montenegro borrowed from China’s Exim Bank must be partially or fully converted into euros, while the other three banks will take on any potential foreign exchange risk.

“This agreement has practically reduced the interest rate on debt to the Chinese Exim Bank from 2% to 0.8%,” Spayich told the media. “On this basis, we will save 8 million euros per year,” he added.

The Bar-Bolyare section is a Montenegrin stretch of motorway that runs from the Adriatic coast to the Serbian capital Belgrade. The Montenegrin line is being built by the CRBC China Road and Bridge Corporation. The first section is 85 percent funded with a $ 944 million loan from Exim Bank.

According to government data for December 2020, Montenegro’s public debt was then 90.85 percent of GDP, while the cost of only the 41-kilometer first stage of the highway was estimated at 45 percent of GDP.

The Ministry of Finance and Social Protection warned that Montenegro lost about 109 million euros due to the previously unconverted dollar-denominated debt into euros.

The U.S. Embassy in Montenegro praised the deal, saying it will further secure Montenegro’s financial stability, while U.S. Special Representative for the Western Balkans Matthew Palmer called for caution in business dealings with China during his meeting with Spaich.

“US officials need to be reminded during their visits that they are dealing only between the US and Montenegro and worry less about friendly relations between China and Montenegro,” the Chinese Embassy in Podgorica replied on Twitter.

In its September 2019 report, the IMF called on Montenegro to reduce the risk of exchange rate fluctuations when repaying a loan.

In February 2020, the former government led by Milo Djukanovic’s Democratic Party of Socialists, DPS, said it was in talks with seven banks to protect against currency risk on a highway loan.

On April 15, the new government announced plans to negotiate with the European Union to repay a nearly billion dollar loan from China, saying it is looking for better terms to finance its largest infrastructure project.

On March 18, Deputy Prime Minister Dritan Abazovic asked the EU to help Montenegro replace Exim bank’s debt with a loan from a European bank, but the European Commission said the EU would not help Montenegro repay the loan, even if it sympathizes with the goal of reducing dependence on China.

On July 7, the Minister of Economic Development Yakov Milatovic said that Montenegro had several weeks left before the conclusion of an exchange or refinancing deal with European and American banks. “There are two options: the first is to refinance, the second is to exchange the loan, or the third is to make part of the first and part of the second,” Milatovic told Reuters.

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