By investing in government bonds, every citizen can contribute and demonstrate their faith and support for the Estonian state. Government bonds strengthen its security, provide additional income for Estonians, and stimulate the economy.
The long-awaited issuance of government bonds targeted at Estonian retail investors, which has been on nearly everyone’s mind in recent months – whether as an alternative to tax increases or borrowing or as a measure of patriotism – is now open. Various opinion leaders have expressed the need for these bonds, and a recently conducted public opinion survey confirmed that one in four Estonians would consider purchasing a government bond.
Now, after a year of preparations, every Estonian has the opportunity to contribute to their country by essentially lending to the state and earning a guaranteed interest income.
Estonian household deposits are at a record high, totaling over €12.4 billion as of July, with the highest annual growth rate in the Eurozone. However, one-third of this amount is sitting in current accounts, earning virtually no interest. It is wise to invest this money in a secure return, and it is wise for the government to offer this opportunity through bonds. There are several good reasons for this.
Chance for Everyone to Contribute
By purchasing government bonds, one can invest in their homeland. Since the beginning of the COVID-19 crisis, the Estonian state has been more active in issuing both long-term and short-term bonds to foreign funds and professional investors, but until now, local retail investors have never had the chance to participate.
Estonians are at the forefront of contributing to national defense, but to protect their freedom, they must strive even harder and secure additional resources. The need for other investments, including efforts to revive the economy, is also growing.
As the state’s current resources are insufficient, borrowing becomes necessary. Through government bonds, every citizen can contribute, demonstrating their faith and support for the Estonian state. Estonia is a small, close-knit, and supportive nation, and together, its citizens can achieve a great deal.
Low-Risk and Guaranteed Returns
When the state raises additional funds through bonds, the local investment environment is enriched with a new instrument. Government bonds offer a way to take the first steps into the investment world.
Compared to fixed-term deposits, bonds present a lower risk level, stable returns, and greater liquidity, as they can be traded on the stock exchange, allowing them to be sold or purchased as needed. Bonds also come with a government guarantee, providing the highest level of security.
This could be of interest to experienced investors looking to diversify their portfolios with lower-risk instruments and secure a longer-term fixed return, especially in light of expected declines in deposit interest rates.
The bond issuance announced on August 28 allows investors to subscribe to government bonds until September 9. The bonds have a maturity date of September 16, 2026, at which point the state will repurchase them, offering an annual interest rate of 3.3 percent.
While the interest rate is slightly lower compared to a short-term deposit in the near term, it is significantly higher over the bond’s duration. As loan interest rates decrease, so will deposit rates. Therefore, government bonds represent a good alternative for safely holding and growing savings.
If the funds are needed before the government buys back the bonds, they can be successfully sold on the Nasdaq Tallinn exchange, without losing any earned interest. The state pays interest annually, ensuring a steady and regular income from your savings.
Livening up Local Capital Market and Economy
The need to develop the capital market has been discussed for years and remains relevant today. Collaboration with the financial sector is crucial in this regard, but the state can also take necessary steps, one of which, in addition to listing state-owned enterprises on the stock exchange, is the issuance of government bonds. Active participation in the local market not only benefits the domestic economy but also attracts foreign investors, thereby increasing the flow of investments into Estonia.
Borrowing to invest in defense capabilities and necessary projects strengthens the economy. It is also important to note that with government bonds targeted at local retail investors, the earned interest income remains within Estonia.
In summary, government bonds benefit people in Estonia, the state, and the local capital market. However, it is essential to remember that a bond is a loan that must be repaid to the lender by the specified date along with interest. Despite Estonia’s current low debt burden (though it is growing rapidly), the state must be responsible when borrowing and using loan funds.
Written by Mart Vorklaev – member of the Riigikogu Finance Committee, former finance minister (Reform).
