Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2014
CEE Eurobonds – The ‘Sweet Spot’
CEE sovereign bond market is fifth largest in Europe with approx. EUR 400bn total
market cap. CEE sovereign bonds outperform 5Y German and French
counterparts. Romania emerges as CEE regional champion among local currency
bonds; Hungary best regional performer among Eurobonds. Increasing investor
interest in CEE bonds due to more balanced distribution of upward/downward risks
and attractive yields vs. most Euro Area bonds. Cash position of CEE governments
generally comfortable.
CEE bond markets continued to soar this year, in contrast with broader
market expectations at the beginning of 2014. Even geopolitical events could
not stand in the way of this development. We have introduced two Erste CEE
bond indices, which give a glance of the performance of government bonds in
Zoltan Arokszallasi
CEE. According to the Erste CEE Eurobond Index, investments in a basket of
Chief Analyst, CEE Macro/FI Research
Eurobonds of CEE countries have generated higher returns this year (6.9%)
zoltan.arokszallasi@erstegroup.com
than investments in CEE local currency bonds measured in EUR (5.3%) via
the Erste CEE Local Currency Bond Index. Both indices show that that CEE
Rzentarzewska Katarzyna
Macro Analyst, Erste Group Research
bonds have been outperforming their 5Y German and French counterparts,
Rzentarzewska.katarzyna@erstegroup.com while an investment in a basket of CEE Eurobonds could actually significantly
reduce volatility without compromising too much on returns. Our analysis
shows that CEE is not a single bucket; fundamentals matter a lot in spread
development and investors can actually expand their profits if they assess
YTD performance measured in EUR: them properly.
Juraj Kotian
Head of CEE Macro/FI Research
juraj.kotian@erstegroup.com
110
80
Erste CEE Local Currency Bond Index
+6.9% 70
Erste CEE Eurobond Index
60
108
106
104
102
+5.3% 50
100
40
98
30
96
20
94
10
92
VIX (rhs)
Sep-2014
Aug-2014
Jul-2014
Jun-2014
May-2014
Apr-2014
Mar-2014
Jan-2014
0
Feb-2014
90
Please click on the picture to see the video
In our view, the most important factor explaining the cross-country differences
in sovereign risk premium and their changes over time is the relative rating to
the Euro Area. Although the past crisis proved that ratings are imperfect and
rating agencies are often behind the curve, ratings remain the decisive
element in the pricing of sovereign risk premium. Throughout the last few
years, we have seen an overall improvement of the relative rating of CEE
countries to the Euro Area, which partially explains the continued spread
compression. The rest of the rally can be explained by the historically low
market volatility (measured by VIX) and falling rates (5Y EUR swap rate).
However, when we analyzed different fundamental factors to explain
dispersions in sovereign risk premiums, we found Romania to be a huge
outlier in its rating. Romania is actually paying a high penalty for its relatively
low rating, while fundamentals point to the possibility of an upgrade.
Romania’s net international investment position on GDP, an indicator that
correlates very well with rating (and thus risk premium), is already at par with
the much better rated Poland and Slovakia. Fundamentally, we see potential
for sovereign risk premium compression in Romania, which is hindered just by
the lack of a ranking action. Furthermore, fundamentals seem to play an
important role when market sentiment swings. Countries with better relative
ratings (like CZ, SK and PL) seem to be less responsive to change in global
risk aversion, while the reaction of countries with sub-investment grade ratings
(like HR and HU) is greater both in times of sell-offs and bond rallies. An
increase of the VIX that leads to a CDS increase for the Czech Republic or
Slovakia of 10bp triggers about a 60bp increase of Hungarian or Croatian
CDS.
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 1
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Taking a look at the deficit outlook and cash position of CEE governments,
many countries do not need to rush with new bond issuance. However,
Croatia, Serbia, Romania and Turkey can take advantage of the favorable
market sentiment and do some pre-financing in 4Q14. The Czech Republic,
Hungary, Poland, Slovakia and Slovenia will most likely abstain from issuing
on international markets in 4Q14, with Poland and Slovakia preferring to tap
international markets only in 1Q15. Given that the ECB is trying to inflate its
balance sheet via asset purchases and liquidity provision, the interest rate
and yields in CEE should remain cemented at low levels, with ‘some’
downward potential remaining. That should keep investments in CEE bonds
attractive for investors. That is also because many CEE bonds still offer a
more balanced distribution of upward/downward risks and associated reward
in terms of yield against most Euro Area counterparts.
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 2
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Juraj Kotian
Head of CEE Macro/FI Research
Introduction of CEE Bond Indices
392
358
353
218
159
117
114
96
84
61
60
36
35
25
16
1146
838
Italy
France
Germany
Spain
CEE
Netherlands
Belgium
Austria
Poland
Portugal
Ireland
Finland
Greece
Czech Republic
Hungary
Slovakia
Romania
Slovenia
Croatia
2000
1800
1600
1400
1200
1000
800
600
400
200
0
1803
1554
Market capitalization of bond
markets (EUR bn, 2Q 2014)
Source: Bloomberg, Erste Group Research
2014Q2
2014Q1
2013Q4
2013Q3
2013Q2
2013Q1
2012Q4
2012Q3
2012Q2
2012Q1
2011Q4
2011Q3
Long-term sovereign ratings
Euro Area (S&P)
CEE Local Currency Bonds
CEE Eurobonds
AAA
AA+
The CEE government bond market has taken on more significance over the
last few years. The low interest rate environment is forcing institutional
investors to look beyond their traditional markets, as the possibilities have
dwindled regarding where to find any reasonable yield to compensate for the
risks. At the beginning of this year, there was a general consensus that, with
economic recovery in Europe and the Fed’s tapering, yields should be heading
north, which would have ended the rally in government bonds. Conversely, due
to low inflation and bleak economic outlook for Eurozone yields have been
dropping and thus contributing to the positive performance of CEE government
bonds. Even the Ukraine-Russia conflict has not halted this trend.
CEE is the fifth largest government bond market in Europe
Apart from Poland, the bond markets of individual CEE countries are relatively
small in the international context. However, pooling them together creates the
fifth largest government bond market in continental Europe. The market
capitalization of the CEE government bond market is worth almost EUR 400bn
and is larger than the Dutch, Belgian or Austrian government bond markets.
CEE bonds still provide a decent yield relative to their fundamentals or ratings.
Actually, the relative rating of CEE countries vs. the euro area has improved in
recent years. This is not only because of massive downgrades in the euro
area, but is also thanks to the fact that some countries have been upgraded
(i.e. Romania).
In order to better describe the performance of government bond markets in
CEE, we have introduced two Erste CEE Bond Indices. The first, the Erste
A+
CEE Local Currency Bond Index, simulates investment in 5Y government bond
A
paper issued in local currency and calculates the total return in EUR including
Acurrency gain/loss. Given that some investors do not want to take any currency
BBB+
risk, we also launched the Erste CEE Eurobond Index, which calculates the
BBB
performance of investments in euro-denominated Eurobonds with maturity of
Source: Bloomberg, Erste Group Research
about five years. The CEE countries included in those indices are Croatia, the
Note: weighted average rating, CEE ratings Czech Republic, Hungary, Poland, Romania, Slovenia and Slovakia, while the
are composite ratings (S&P, Moody’s, Fitch)
last two are omitted from the Erste CEE Local Currency Bond Index, given that
they are both euro area members.
Since the beginning of this year up to September 15, investments in CEE local
Year-to-date total return from
investments into 5Y government currency bonds and Eurobonds with a maturity of around 5Y were yielding a
total return measured in EUR of about 5.3% and 6.9%, respectively. The
bonds (return in EUR, %)
12
performance of CEE local currency bonds was much more volatile and
10
negatively affected by the weakening of CEE currencies, in particular the
8
Hungarian forint. But even taking the negative exchange rate effect into
account, CEE local currency bonds were outperforming investments in the 5Y
6
German Bund or French bond, which yielded in the same time period just
4
3.8% and 4.6% (YTD, including capital gains), respectively.
2
AA
1.3
2.4
3.8
4.3
4.6
5.0
5.2
5.3
6.8
6.9
7.6
8.5
9.0
9.2
9.2
9.4
9.8
10.0
AA-
HU (LCY)
CZ (LCY)
DE
SK
FR
CZ
PL
CEE (LCY)
PL (LCY)
CEE
HR
HR (LCY)
IT
RO
ES
SI
RO (LCY)
HU
0
Source: Bloomberg, Erste Group Research
Note: period Jan 1st 2014-Sep 15th 2014,
LCY = 5Y local currency bonds (generic),
otherwise 5Y EUR denominated bonds
(Eurobonds for CEE)
Among local currency bonds, Romanian 5Y bonds, with a 9.8% total return,
outperformed the whole region by far. This is mainly because its currency has
not weakened (as it has been well anchored by the central bank) and the
liquidity surplus brought yields downs. While HUF-denominated bonds were
underperforming our Erste CEE Local Currency Bond Index, Hungarian
Eurobonds were the best performers in broader terms, with their 10% annual
return beating even Italian, Spanish and Slovenian bonds. Hungarian
Eurobonds have benefited most from the further spread compression of
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 3
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
sovereign bonds in Europe. Later in this report, we analyze which factors
influence sovereign risk premiums and attempt to check the potential for
further compression or risks of reversal. For more on sovereign risk premium,
please read ‘What influences sovereign risk premium in CEE?’.
Total Return vs. volatility
Total return
(Jan 1st 1014- Sep 15th 2014, % )
12
10
HU
RO
IT
8
Erste CEE
Eurobond
Index
6
ES
CEE Eurobonds: reducing risk without compromising much on
returns
PL
CZ
SK
4
SI
HR
FR
Bund 5Y
2
0
0
0.05
0.1
0.15
Volatility
0.2
0.25
0.3
Source: Bloomberg, Erste Group Research
Note: period Jan 1st 2014-Sep 15th 2015
Volatility = stad. dev. of daily changes
5Y government bond yields
th
(as of Sep 15 2014)
3.5
3.6
3.7
4.0
3.5
2.4
2.5
2.7
3.0
2.0
2.0
2.5
1.5
1.0
0.5
0.2
0.4
0.4
0.7
0.7
0.9
1.1
1.1
1.1
1.3
2.0
DE
FR
CZ LCY
CZ
SK
PL
ES
SI
IT
CEE
RO
HU
CEE LCY
PL LCY
HR
RO LCY
HR LCY
HU LCY
0.0
CEE Eurobonds have also been performing very well in risk adjusted terms.
By buying a basket of CEE Eurobonds, investors could actually significantly
reduce volatility without compromising too much on returns. The volatility of
the Erste CEE Eurobond Index, as measured by standard deviations of daily
changes, was lower than that of individual CEE countries or even Germany.
When it comes to the outlook and performance of CEE bonds in 4Q14, the
development of the external environment will play a crucial role here. Given
that the ECB is trying to inflate its balance sheet via asset purchases and
liquidity provision, the interest rate and yields should remain cemented at low
levels, with ‘some’ downward potential remaining. But when looking at current
yield levels across Europe, it is clear that risks are distributed asymmetrically
– the potential for any further drop is yields is nearly at an end for many
countries, while the current yield level (in many countries this is sub 1% on 5Y
bonds) does not adequately price in any upward risk. From this perspective,
many CEE bonds still offer a more balanced distribution of upward/downward
risks and associated reward in terms of yield. Furthermore, we see some
opportunistic potential for short-term currency gains in Hungary and Poland
ahead of year-end, which could boost the performance of the Erste CEE
Local Currency Bond Index.
Source: Erste Group Research
LCY = 5Y local currency bonds (generic),
otherwise 5Y EUR denominated bonds
(Eurobonds for CEE)
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 4
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Katarzyna Rzentarzewska
Macro analyst, Erste Group Research
What influences sovereign risk premium in
CEE?
Relative rating to Eurozone and
level of spreads
Over the last few years, we have been observing compression of credit
default spreads across CEE countries. To some extent, it has been
associated with the fact that the global index of risk (VIX) has been steadily
dropping and the premium for risky assets has been going down. Despite the
common downward trend in all CEE countries, the differences in credit default
spread levels are not negligible. Although the region tends to be seen as a
homogenous area and its markets are prone to co-move in response to
changes in global sentiment, the diverse level of fundamentals seems to
explain why the level of credit default spreads vary across the region.
Moreover, it appears to affect the magnitude of responses to increases in risk
aversion.
Source: Bloomberg, Erste Group Research
Response to increase in global
risk aversion
Source: Bloomberg, Erste Group Research
Country
CZ
PL
HU
RO
SK
Credit Default Spread 5Y Relative rating to Eurozone International Investment Position
86.1
-0.4
-48.6
133.7
2.5
-66
362.2
6.4
-105.2
6.5
263.4
-65.2
137.5
1.4
-64
As far as global factors are concerned we identify risk-free interest rate (10Y
Euro Swap) and attitude toward risk (VIX index) as significantly related to the
spread level. Further, fundamental factors, such as the current account
balance and relative rating to the Eurozone are directly linked to credit default
spreads, so that improvement of a country’s economic conditions is
associated with a downward move in the credit default spread level. The lower
the relative rating is (i.e. the difference to the Eurozone is smaller) and the
smaller the current account deficit the country has, the lower the level of CDS.
Moreover, a country’s rating seems to have indirect effects as well, as better
fundamentals induce a smaller response to changes in global risk aversion. In
particular, countries with better relative rating to the Eurozone, should
experience smaller increases in credit default spread levels than countries
with worse ratings when global risk aversion increases.
In other words, we find that countries with strong fundamentals (low relative
rating) remain more resilient to global turmoil. Thus, when risk surge suddenly,
such countries as Slovakia or Czech Republic should experience increase in
the CDS level by roughly 10bp (i.e.20% higher from current level), while
Romania or Hungary may experience widening the spreads by around 60bp
(i.e. more than 30% higher from current level).
Romania as an outlier in terms
of rating position
Source: Eurostat, Erste Group Research
While we think of the level of the risk-free interest rate and changes in risk
aversion as common factors impacting CDS moves in all CEE countries,
differences in fundamentals seem to drive the dispersion between CDS levels
across CEE. In our view, the most important factor explaining the changes
between the CEE CDS levels is the relative rating to the Eurozone. The rating
is considered to be a reflection of a country’s riskiness. In other words, it
should incorporate the influence of the main macro indicators reflecting the
condition of the economy, and in particular the international investment
position. In this respect, the relative rating to the Eurozone seems to reflect
the fairly current level of fundamentals in all CEE countries, apart from
Romania. Romania is a clear outlier – countries such as Poland and Slovakia
that have similar international investment positions have better ratings than
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 5
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Romania (the lower the number, the smaller the difference between the
country’s rating and the Eurozone). Naturally, we expect that an improvement
in rating is linked to a drop of spreads. Our model shows that, given the
current level of global risk aversion, improvement in the relative rating by 1
notch should be associated with the CDS level dropping by roughly 30bp on
average. Intuitively, the changes in the current account deficit are expected to
have similar effects on the CDS levels, though, in our view, to a lower extent
(reducing the current account deficit by 1pp should be on average related with
a 6bp drop in CDS).
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 6
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Cash position of CEE governments generally
comfortable
Zoltan Arokszallasi
Chief Analyst,
CEE Macro/FI Research
Primary market in 4Q14: no rush to increase supply
CZ and SI showing robust cash
positions
120%
100%
80%
Budget deficit figures altogether in CEE should decrease slightly from this
year. The tendency is a decline of deficit figures where the levels were
exceeding the 3% of GDP threshold, while in other countries, the deficits are
at a relatively low level. Altogether, the budget deficit for the CEE region
should decline to around 3% in 2015 (from somewhat above 3% this year, if
we consider that the Polish deficit could have been above 3% of GDP this
year without the takeover of pension fund assets).
60%
40%
20%
0%
HR CZ HU PL RO RS SK SI TR
Cash buffer / 12m redemptions
Compl. of planned financing 2014
Taking a look at the redemption situation and cash buffers in CEE countries
and Turkey, several countries should not be in a particular rush to increase
supply. Some countries are actually expected to reduce the amount of public
debt in 4Q either via buybacks or a lower amount of primary issuance, in order
to comply with their debt-brake rules (Slovakia, Hungary). Other countries
have a very high level of cash buffer (the Czech Republic, Slovenia), which
allows them to have a net issuance of zero in 4Q14 and even beyond. As for
other countries, however, pre-financing 2015 redemptions could be a viable
option (e.g. Poland), while some countries need to carry out substantial
financing still this year, due to their not being able to complete the financing
plan, or having a very low level of cash buffer (the most notable example of
the latter is Romania).
As for foreign issuance, we expect the Croatian, Serbian, Romanian and
Turkish governments to tap foreign markets in order to do some pre-financing
for 2015, while Poland and Slovakia may tap foreign markets in early 2015.
Demand side should remain supportive
Yields to notably increase only
in Romania in 4Q14
1.00
0.80
0.60
0.40
0.20
0.00
-0.20
-0.40
-0.60
Forecasted change of l/t
yields vs. current levels
HR
CZ
In the past few years, the demand for local currency government paper in the
region soared by non-resident investors. Despite the Fed’s expected
tightening, the ECB’s additional steps should help foreign demand remain
supportive of local bond markets. As for banks, their appetite should also
remain pronounced, given the high liquidity in the banking systems generally
in CEE. One exception could be Hungary, where the conversion of FX loans
into HUF loans could increase the demand for HUF liquidity, and thus,
decrease the appetite of banks for government securities.
HU
PL
Yields to generally remain low
RO
Central banks in the region should continue to pin down the short end of the
yield curve, keeping policy rates low (or even cutting them further in Poland).
Inflation figures are expected to remain rather muted in CEE, with an average
of below 2% in 2015, after the muted 0.4% predicted for 2014. Overall,
moderate supply, the expected support from ECB measures, low inflation and
a generally accommodative monetary policy should help keep yields relatively
low in CEE on the government bond markets. An exception for the short run is
Romania, where political risks could increase spreads in the fourth quarter,
while the relatively low level of cash reserves and a demanding roll-over
structure could lift yields. On the other side of the spectrum, the Czech
Republic should see yield levels remain pinned down at current rates, and
(given the favorable cash position, no plans for net issuance and solid
fundamentals) the spread vs. Bund yields could even become negative in
2015.
SK
SI
RS
4Q14 1Q15 2Q15 3Q15
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 7
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Rainer Singer
Senior Economist, US & Eurozone
Major Markets
Stellar performance of
Eurozone bond yields in 2014
Eurozone bond markets have shown a stellar performance in the course of
this year, with yields declining and spreads of peripheral countries tightening.
Indeed, the environment could not have been more supportive for fixed
income securities. Only a few months after the onset of the Ukraine crisis,
economic indicators for the Eurozone started to worsen and inflation rates
continued their decline, triggering interest rate cuts by the ECB and additional
liquidity providing measures. All these factors brought sovereign long-term
yields (significantly) below historic lows. Geopolitical risks, namely the standoff between Russia and Western countries, which affects the Eurozone
significantly, cannot be predicted. In our baseline assumption, we do not
expect an acceleration of the crisis, as the political and economic price to be
paid would be too high. Accordingly, we would see the influence on bond
markets subsiding from this side during the last months of this year.
10y Sovereign Bond Spreads, in %
8
7
6
5
4
3
2
1
0
02.10
02.11
IT
02.13
02.12
DE
ES
02.14
AT
Source: Bloomberg
Economic indicators are expected to remain weak for the coming months.
Leading indicators lead us to expect a decline of economic output in the
Eurozone in the third quarter and modest growth in the in the last quarter of
the year. Additional support for low-yield levels will come from liquidity
operations. 8 TLTRO operations over two years and asset purchases covering
the ABS and covered bond markets will provide banks access to additional
liquidity The maximum amount possible for the first two TLTRO operations is
EUR 400bn, for the asset purchase programs it is difficult to estimate before
details will be announced at the beginning of October. In any case,
considerable amounts of additional liquidity will be provided to markets before
year-end, supporting the high valuations of sovereign Eurozone bonds. As a
mid-term aim, ECB President Draghi has mentioned the ECB’s previous
balance sheet high, which is equivalent to an expansion by EUR 1trn from the
current level. Weighing all these factors, we would expect German yields to
remain roughly unchanged until year-end, as current market expectations will
be confirmed, but do not want to rule out further spread compression of
Eurozone peripheral bonds, as additional liquidity should rather flow into
spread markets.
Draghi: ECB balance sheet to
grow to historical high
ECB Balance Sheet, EUR bn
3500
3000
2500
2000
1500
1000
500
0
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
EUR 1 trn
Source: ECB
Next year, we expect the Eurozone economy to stabilize, showing a stable albeit moderate - recovery. Economic factors should trigger a moderate
upward movement of yields, but valuations will remain high. However, should
the current extremely low rate of inflation remain at these current low levels
too long, there would definitely be more of a chance for the ECB to enter into
broad-based asset purchases, i.e. government bonds, next year, which would
dampen any reaction of yields to better economic data.
Looking across the Atlantic, we expect the US economy to continue on its
growth path, justifying a first rate hike in March 2015, with further hikes to
follow during the year and beyond. Accordingly, Treasury yields are set to rise
and shorter maturities should be more affected than longer-dated ones. The
latter could possibly be supported through capital inflows from the Eurozone,
courtesy of the ECB’s liquidity supply.
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 8
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Alen Kovac
Chief Economist of Erste Bank Croatia
Croatia
Fiscal prospects remain gloomy
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
90
80
70
60
50
40
30
20
10
0
2010
2011
2012
2013
2014f 2015f
Govt. budget balance (% of GDP)
Public debt (% of GDP) RHS
Source: MoF, CBS, EBC
Supply and demand factors
A demanding funding profile is certainly no big news. Croatia tops its regional
peers, with funding needs in the vicinity of 20% of GDP. Nevertheless, the
2014 financing operations YTD have run rather smoothly, and as far as 2014
is concerned, the final quarter is set for a smooth T-bill rollover, and the MoF
may yet opt for a smaller (up to EUR 500mn) bond placement on the local
market. We see very limited room for negative surprises there.
Moving on to 2015, gross financing needs remain elevated and close to 22%
of GDP. Once again, the large maturing T-bills stock (approx. 9% of GDP) are
inflating the refinancing needs, although it should also be vivid on the bonds
side, with three bonds due in 2015. We are working with a budget gap
estimated at 4.5% of GDP for 2015, i.e. we are anticipating approx. 1pp of
GDP consolidation effort under the EDP next year. We are currently in the
dark when it comes to any tangible details surrounding financing plans. We
would expect a full T-bill debt rollover, a fairly limited focus on the expansion
of financing via traditional credit and a more aggressive focus on bond
financing. Our best guess here would be that the MoF would opt for some prefinancing in 4Q14, given the Eurobond (EUR 750mn) maturing early in 1Q15
and a favorable moment to close a proportion of funding needs for 2015. Later
in 2015 we expect to see more activity on the local market, given close to
EUR 1.1bn in maturities on the local market.
On the demand side, banks remain essential for smooth T-bill and credit
rollover, although the recent track record suggests a likely limited appetite for
further exposure increase. Therefore, pension funds remain the segment with
the healthiest sovereign debt appetite, although some one-offs could curtail
demand (transfer of part of the assets from the second pillar to the first would
trim the liquidity position by approx. EUR 350mn p.a. in 2014 and 2015, the
regulatory framework encourages more equity exposure, and the pending
highways concession). Consequently, a reliance on external funding remains
clear. The risks here remain balanced: fundamental underperformance related
to mediocre growth prospects and a lack of fiscal consolidation weigh on the
risk profile, but an accommodative ECB monetary policy works in the opposite
direction. In our baseline scenario, we continue to see financing options as
viable and the markets once again providing more maneuvering room for
policy makers.
Foreign ownership on the rise
45%
43%
41%
39%
37%
35%
33%
31%
29%
27%
25%
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
T-bills/bonds
owned by the
foreign investors
Source: CNB
Other factors
On the privatization side, the above-mentioned highway monetization process
may result in EUR 2.4-3.2bn in one-off revenues. At the moment, it remains
hard to attach any exact likelihood to these revenues, as the process remains
politically sensitive. The process gains importance with the ESA2010
adoption, with highway-related debt feeding into public debt figures (a one-off
upside effect slightly close to 10% of GDP). Therefore, monetization receipts
may be used to offset a proportion of the related one-off shock.
As for yields, we see the current market drivers offsetting the fundamental
vulnerabilities and therefore see HRK yields close to the 3.5% mark. Ample
market liquidity, and a comfortable CNB and ECB stance support the investor
focus shifting to the longer end of the curve and supporting the ongoing low
yield environment. However, vulnerability to monetary policy course shifts and
more fundamentally-driven investor focus remains a clear mid-term downside
risk.
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 9
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Czech Republic
David Navrátil
Chief Economist of Ceska sporitelna
Jan Šedina
FI analyst at Ceska sporitelna
Supply and demand factors
Absorption capacity of banks to
buy govies is high
Absorption capacity (CZK bn)
1,400
1,200
The most important recent message from the Czech MoF relating to its
issuance activity is its aim to stabilize the total amount of the central
government debt at the current levels (CZK 1.68trn; regardless of the
development of the business cycle) at least until the end of 2015 (no new debt
issuance in both 2014 and 2015). As a result of the considerable improvement
in liquidity management, the MoF will be able to comfortably cover both 2014
and 2015 deficits by excessive cash reserves (CZK 286bn as of June 2014).
1,000
800
600
400
200
0
2002
2004
2006
2008
2010
2012
2014
Absorption capacity
FI securities held
Liquidity surplus (deposits and issued securities minus loans)
Source: CNB
This year’s gross financing needs (CZK 264.9bn, without the 2.0% expected
central government deficit) are estimated to decline to 6.6% of nominal GDP,
from 8.0% in 2013. Regarding the recent more extensive incorporation of
lending facilities helping to cover the state’s borrowing requirement, the total
amount of outstanding T-bill as well as T-bond stock is expected to
moderately decrease at the end of 2014 compared to the previous year. In
2014, the MoF will also refrain from rolling over in total CZK 83.6bn in
Eurobonds, resulting in a decline in the share of foreign bond issues in total
government securities to roughly 15%, from 20% at the end of 2013.
However, the share of foreign investors’ holdings in total outstanding
government bonds remains rather stable (at 11.3% as of July, compared to
12.3% in January 2014).
On the demand side, the main buyers are banks, which hold nearly half of the
LCY debt. We expect the loan to deposit ratio to be stable around 74% and
assets growing by ~5%. This means business as usual, allowing banks to
absorb an additional CZK 50bn. One should also add the still increased
liquidity through the 2-day intervention done by the CNB in 2013, which
increased the liquidity surplus by CZK 200bn. Although the high share of
bonds in banks’ balance sheets (21%) could limit appetite for local govies,
there does not seem to be any attractive alternative. Pension funds and
insurance companies hold ¼ of LCY govies and their (new) demand in 2015
should be roughly CZK 40-50bn.
Other factors
Banks have lots of liquidity
placed at CNB
Total Amount of Domestic Banks'
Deposits with Central Bank (CZK mln)
800,000
As the CNB is unlikely to proceed with withdrawing the CZK 200bn in liquidity
poured into the Czech financial sector (in late 2013) before the start of 2016
(with respect to the CNB promise to keep the EURCZK above 27 as well as
the key refinancing rate at technical zero at least until 2016), monetary policy
will maintain its supportive role in keeping yields at low levels.
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
1994
1998
Source: CNB
2002
2006
2010
2014
In summary, with respect to the government’s effort to not to take on new debt
at least until the end of 2015, the public debt-to-GDP ratio is expected to
decline to 43.1% in 2015 (from 46.0% in 2013). As the supply of government
debt is going to remain rather stable in the coming quarters, the abundant
liquidity within the Czech financial sector, expected further acceleration of
Czech GDP growth (2.7% in 2015) and the government’s large cash reserve
should act as the dominant factors keeping yields compressed in 2015.
Therefore, we see the yields of 10Y T-bonds at 1.25% at the end of 2015
(unchanged compared to their current levels), with the spread to German 10Y
papers turning negative in the course of 2015 (-0.3pp at the end of 2H15).
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 10
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Gergely Gabler
Macro Analyst of Erste Bank Hungary
Hungary
Supply and demand factors
Investor structure of HUF
denominated government paper
(2Q14)
Local currency bond supply is expected to be strong, as the budget deficit is
expected to grow next year, given the already known fiscal loosening
measures (e.g. further tax relief for 2-child families, tax deductions for banks
on FX Mortgage Relief, etc.). Furthermore, the government plans no FX issue
next year; FX redemptions should thus be covered by HUF issues as well.
8.1%
14.3%
33.1%
12.3%
32.2%
Foreign investors
Pension Funds
Other
Banks
Retail investors
Source: Govt Debt Mgmt Agency
This year, Hungary has to cover a total of EUR 5.4bn in FX redemptions. Next
year, FX redemptions will only amount to EUR 2.4bn. However, the
government plans no Eurobond issues for the whole year, and the demand for
local EUR-denominated bonds will drop significantly, as only retail investors
will be eligible for them. The demand for local currency bonds, however, could
fall notably next year. On one hand, foreigners have built up a massive
position in HUF bonds, while the depreciation of the forint may discourage
these investors from renewing the maturing bonds. On the other hand, local
demand may drop as well, as the ample forint liquidity of banks could drop
significantly next year. Firstly, the conversion of FX mortgages (EUR 12bn,
HUF ~3800bn) will swipe a substantial amount of the HUF 4800bn in extra
liquidity of banks (two-week deposits at the central bank). Secondly, the signs
of intensifying lending activity after a few years of coma should also reduce
bank demand for government bonds.
The importance of pension funds is still very low after the destruction of the
mandatory private pension fund system. The remaining voluntary pension
funds also lack strong fund inflows. As for mutual funds, the fund inflow was
rather strong in the last few years, as their ex-post returns were far more
attractive than the ex-ante interest rates of bank deposits. However, this
process will likely turn back, as the central bank rate cuts have finished and
the banks will need more liquidity.
10 year bond yield development
7
USA
Germany
Hungary
6
5
These factors will likely lead to increasing bond yields next year, in spite of the
extremely loose monetary policy and QE measures by the ECB. We expect
10-year bond yields to stay at 4.8% by end-2014, while they may increase to
5.0% by end-2015.
4
Other factors
3
Besides these factors, we have to note that the central bank’s so-called SelfFinancing Plan was quite successful in increasing the demand for local bonds
and decreasing long-term bond yields. However, the flow effect (shift from
two-week bills to govies) of this measure ended in August, so the additional
demand is declining significantly. This has already resulted in a correction of
long-term bond yields.
2
1
0
Jan-14
Mar-14
May-14
Source: Bloomberg
Jul-14
Sep-14
It is also an important factor that many foreign investors in Hungary consider
dollar bonds as a benchmark for HUF bonds. The increasing expectations of
a Fed rate hike in 1H15 have already resulted in an upward shift in the 10year US bond yield (2.56% vs. the 1.04% Bund yield). A further increase in
US rates could force Hungary’s long-term bond yields higher, in spite of the
record-low German rates.
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 11
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Katarzyna Rzentarzewska
Macro analyst, Erste Group Research
Poland
Supply and demand factors
Poland has already finished financing this year’s borrowing needs and in
4Q14 it should start to pre-finance next year’s financing needs. The Ministry of
3.5
Finance plans an increase of next year’s gross borrowing needs to PLN
yield curve, current
yield curve, year-end
154.8bn, i.e. around 9% of GDP (from PLN 127bn this year). This includes
3
PLN 100.8bn in maturing debt, while net borrowing needs constitute roughly
2.5
one third (PLN 54bn vs. PLN 47bn in 2014). The increase mainly reflects the
2
setting of the maximum level of the budget deficit in the amount of PLN 48bn
(vs. a budget deficit of PLN 34bn this year) and the budget deficit of European
1.5
funds at EUR 3.5bn (EUR 391mn in 2014). Although we see some downward
risk to the economic growth and inflation rate assumptions of the Ministry of
Finance (3.4% and 1.2% on average, respectively), in our view, the expected
Source: Bloomberg, Erste Group Research revenues and expenditures are planned cautiously, and we see overshooting
of the planned deficit as unlikely. As there is little maneuvering space left to
increase government spending (if Poland wants to exit EDP in 2016), the
supply of bonds should remain limited.
10Y
5Y
2Y
3MWIBOR
Yield curve development
Foreign investors are the main buyers of Polish papers (they hold almost two
thirds of debt) and we expect them to keep that role in the near future. These
are mostly stable and long-term investors (such as central banks, pension
and investment funds) looking for attractive - but still safe - returns. The Polish
bond market should continue to offer these conditions. The high share of
foreign investors, however, bears a risk of capital withdrawal in the case of
market turbulence, but their long-term character (roughly half of the securities
held have an average maturity above seven years) reduces the roll-over risk
compared to short-term maturity papers. Thus, the strategy to extend the
average maturity (T-bills are already withdrawn) attracts such investors and
may discourage domestic banks from buying, as they prefer shorter maturity.
Other buyers include investment funds and insurance companies (nonbanking sector) and we expect their share to increase only in the long-term
perspective.
Other factors
Foreign investors’ holdings
increased
100%
80%
60%
40%
20%
00%
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Foreign investors
Banks
Pension Funds
Other
Source: MinFin, Erste Group Research
Despite the expected increase of borrowing needs for the next year, the
overall supply of bonds dropped when the pension system reform was
introduced earlier this year, which should support a lower level of yields.
Moreover, the reform changed the currency and debt-holder structure of the
debt. First, the share of debt denominated in foreign currency increased from
32% to 35%. The strategy, however, assumes a targeted share of 30%, which
implies lower net issuance of Eurobonds in the near future. Further, the
absence of Open Pension Funds that had played the role of ‘market stabilizer’
could make the Polish bond market more sensitive to global trends and core
markets’ behavior. If German Bunds remain stable until the end of the year, as
we currently expect, we should not see any major upward move on the long
end, as domestic factors (expectations for rate cuts in Poland) favor a low
level for yields as well. All in all, we currently see 10Y yields close to 3% at the
end of the year, which makes the market conditions attractive for prefinancing. We expect the Ministry of Finance to have around 15% of next
year’s borrowing needs pre-financed by the end of the year. In particular, for
the medium term, we expect 10Y yields to moderately increase toward 3.2%
in 1H14, as we presume a steepening of the curve, due to the improving
economic outlook (both in the Eurozone and Poland).
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 12
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Romania
Dumitru Teodor Dulgheru
Senior Analyst
5-year ROGB yields
Russian annexation
of Crimea after
referendum
5.0
4.8
5.0
4.8
4.6
4.6
EU extends
sanctions
against Russia;
Russia bans
EU/US imports
4.4
Local political
crisis; ruling
coalition
break-up
4.2
4.0
3.8
3.6
3.4
Protests
flare up
violently in
Ukraine
3.2
4.4
4.2
4.0
3.8
Malaysian
flight shootdown; US
announced
announces
new sanctions
against Russia
3.6
3.4
3.2
3.0
Jul-14
Aug-14
Jun-14
May-14
Apr-14
Mar-14
Jan-14
Feb-14
Dec-13
3.0
Although the international context, especially that on the eastern border of
Romania, has been anything but calm this year, the country has enjoyed a
visible rally of its asset prices. Being a NATO and an EU member counted
significantly in its favor when investors fleeing the East were making the
decision whether or not to invest. The uptrend in prices was reinforced by the
S&P agency decision to increase Romania to investment grade in mid-May,
and by the JP Morgan announcement in mid- to late-July that new Romanian
benchmark bonds were being added to their investment grade emerging
market index. However, no one could contend that Romania is immune to the
external environment, all the more so as the escalating conflict in neighboring
Ukraine has every now and then clearly sent shivers down investors’ spines
(see the upper chart on the left-hand side). 5-year ROGB yields hit their
lowest in early- and late-July (3.2%) on the secondary market; yields have
been drifting up and down ever since, without reaching their all-time low.
Supply factors
Source: MinFin, BCR Research
As of end-September, the MinFin had covered around 82% of its total funding
needs for this year, thanks to the three outings in January and April (22% of
FY14 funding needs). They have also helped local yields remain, in general,
on a downtrend up until now, as the MinFin borrowed less from the local
market (the average yield on the primary market fell to 3.7% in the first eight
months of 2014, from 4.7% in 2013). True to its strategy, the MinFin has
managed to lengthen maturities, which is why gross funding needs for 2015
have dropped to around RON 50bn; around 22-23% thereof could be tapped
from abroad, while the balance will be sourced domestically.
Demand factors
RON public debt by type of
holder
40
Local banks, investment and pension funds will be the main buyers of
government notes in 2015, with an increase in net exposure of around RON
6bn. Although a fledgling industry in Romania, private pension funds have in
only a few years become one of the main investors in state bonds, accounting
for more than 9% of the total market. Although European quantitative easing
may spill over some money into Romania and drive assets prices slightly
higher, we see rather limited growth potential for non-resident exposure in
2015 (especially after the stuffing of their fixed income portfolios in 2013 and
to a lesser extent in 2014). Non-residents started to vigorously bulk up their
portfolios in early 2013 and are now claiming more than 20% of the total local
bond market.
20
Other factors
140
120
Non-residents
Other residents
Local banks
100
80
60
0
2011
2012
2013
2014e
Source: MinFin, BCR Research
2015f
The central bank cut the key rate further to 3% this fall, and it has already
signaled that it is ready to bring money market rates closer to the key rate,
adding that local banks need to work in a more stable interest rate
environment (interest rates have been strikingly lower than the key rate since
early 2014). The 3M ROBOR rose to 2.8% from less than 2.1% less than a
month ago. Presidential elections are around the corner (early November)
and the whiff of populist measures is growing stronger and stronger. On the
European front, the QE which is expected to fire up lending could be thwarted
by the spillover effects in other type of assets and by the lack of fiscal reforms
in some big European economies. This, combined with an already slowing
Eurozone and smothering conflict on the Easter borders, could make
investors contemplate higher return investments across the pond. We see 5year ROGB drifting up to 4.1% in December 2014 and then gradually nudging
lower towards 3.7% as of end-2015.
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 13
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Serbia
Milan Deskar-Skrbic
Macroeconomic Analyst
Erste Bank Croatia
Supply and demand factors
Fiscal risks very much alive
0
-1
-2
-3
-4
-5
-6
-7
-8
80
70
60
50
40
30
20
10
0
Gross financing needs in 2014 are relatively high, standing at around 18% of
GDP (EUR 6.7bn), and incorporating a planned budget deficit of 7% of GDP.
Although we saw no limitations to a smooth rollover of public liabilities, Serbia
is one of the few CESEE countries that have not yet fully secured funding
needs for 2014 (hitting around 80% of total needs at end-August, including a
USD 1bn UAE bilateral loan). The YE indication is that we may see the MoF
tapping the Eurobond market, most likely going for volume in the region of
around EUR 750mn. The timing, in our view, remains determined by the
progress in the upcoming IMF talks and expected positive investor feedback
on the eventual progress to set up a new precautionary standby deal.
2009 2010 2011 2012 2013 2014f 2015f
Govt. budget balance (% of GDP)
Public debt (% of GDP) RHS
Source: SORS, MoF, EBC
Looking to 2015, we expect the financing needs to move to above 20% of
GDP, based on our revised YE15 growth forecast of 1% (vs. the previous call
of 2%), 5.5% of GDP deficit and expected T-bills and bonds maturity of above
RSD 600bn. As for the financing, we see the government keeping its 2014
behavior pattern and trying to roll over the T-bills and T-bonds on the
domestic market, while for deficit and international bond maturity (EUR 500mn
in 2Q15), external debt markets and potential new bilateral deals (such as the
2014 10Y UAE loan with a 2% interest rate) would represent our best guess,
as we are still awaiting details on the 2015 budget and financing profile.
On the demand side, banks remain the key local player and already high
exposure to govies imply some limitations. Foreign investors, IFIs and
bilateral deals remain an essential financing channel. Therefore, we see the
main factors shaping investor demand in 2015 as the commitment and
credibility of the government in the implementation of fiscal consolidation and
structural reform programs. That is also pretty much on the IMF agenda, and
thus striking a new deal with the IMF would anchor policy uncertainty and
internal risk drivers. However, the ECB move towards further monetary
stimulus clearly supports the funding situation.
Other factors
Yields holding steady
8
USD 2020
7
USD 2021
6
The monetary policy outlook is becoming more uncertain, with fiscal risks and
geopolitics hurting the FX outlook and demanding a more active approach
from the NBS. In combination with less room to maneuver in terms of inflation
in the period ahead, we see the NBS as being increasingly more likely to
remain on hold, i.e. we are not anticipating any more aggressive rate cuts in
the quarters ahead, thus supporting the interest rate differential.
5
4
Sep-13
Oct-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jun-14
Jul-14
Aug-14
Sep-14
3
Source: Bloomberg
Although there are no formal details, in the medium term, we could see some
intensification in the privatization process, as the new privatization law was
put in motion and the Privatization Agency (PA) published a list of 502 public
companies (the PA expects approx. RSD 12bn from the sale of additional
spectrum to mobile providers at the beginning of 2015). We take the
privatization plans with a grain of salt; still, in the upcoming period, we could
hope to see an increasing share of “other funding” sources. All that said, we
see Serbian USD yields moving gently below the 5% mark, with the main
downside risks coming from fiscal slippages, additional delays in structural
reforms and a bleaker economic outlook. On the other hand, we see the main
upsides as being the long-awaited progress concerning the IMF deal – which
could be seen as a hard policy anchor – ECB easing and stabilizing
geopolitical tensions.
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 14
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Slovak Republic
Michal Musak
Analyst at Slovenska sporitelna
Supply and demand factors
Debt and deficit trajectory
Public debt (% of GDP, right axis)
-14
60
Fiscal deficit (% of GDP)
-12
50
-10
40
-8.0-7.7
-8
30
-6
-5.1
-4.5
-4
-2.8
-2.8-2.5
-1.6
-2
0
20
10
0
For 2015, we expect Slovakia’s gross issuance to reach some EUR 5.5-6bn
(vs. EUR 4.3bn in 2014 by September) and net issuance around EUR 1.52bn. Most of the new issues will be used to roll over old debt and finance the
deficit, while the government also expects sizeable privatization proceeds.
Due to the maturity profile, the new issuance should be significantly skewed
towards the beginning of the year. In 2015, the debt agency will face roll-over
needs of about EUR 4bn, but it is likely that it will buy back part of this volume
already in 2014, using its cash reserve and debt issuance. Besides interest
savings, the state has an additional motivation to repay bonds early, due to
constraints on the public debt imposed by the local debt brake rule.
1999 2002 2005 2008 2011 2014
2014-16 figures are based on draft of next
year’s budget
Source: StatsOffice, MinFin, SLSP
The debt brake stipulates that once the public debt exceeds 55% of GDP, the
next budget proposal cannot include an increase of public expenses (with
some exceptions). Slovakia broke this threshold in 2013. More seriously, at
57% of GDP, the government would be obliged to propose a balanced
budget, which would require a big chunk of extra consolidation (please note
that the Parliament might alter the proposal, but at political costs and possibly
a higher cost of financing). Hence, the government is motivated to keep the
debt as low as possible.
The government also plans the privatization of a minority 49% stake in Slovak
Telekom, which is expected to net about EUR 1bn (1.3% of GDP) in 2015.
Most of the proceeds should be used to lower the debt.
Other factors
Yields declined considerably
Yield-to-maturity at 2020 bonds
7
6
DE 2020
5
SK 2020
4
spread
3
2
1
0
Jan-11
Jan-12
Jan-13
Jan-14
7-day moving averages
Source: StatsOffice, MinFin, SLSP
The state sees little financing pressures and we also see no imminent
problems going forward. 10Y yields stand at 1.6%, while 4Y yields go as low
as 0.3% on the secondary market. Amid the low interest rate environment, the
agency has avoided T-bills recently. The debt agency has increasingly used
private placements, in order to broaden the client base. While hedged, these
have often been issued in foreign currencies. Out of the EUR 4.3bn issued by
September 2014, EUR 1.5bn was a single syndicated issue, EUR 1.9bn was
issued in regular tap auctions in total and the rest was in private placements.
Loans and deposits should cause a negative funding gap for local banks and
the appetite for leverage is limited. No other local sector is a significant net
buyer of bonds either. Hence, the government relies more on foreign
investors. At the end of 2009, foreign investors held 10% of Slovak debt. It is
50% at present. In the past, a retail issue was mulled, but this has never
come to fruition and the talk faded out.
With little domestic pressures, we expect Slovak government yields to mainly
follow the developments in the Eurozone. Reflecting the increase of German
10Y bond yields in 2015, we see a similar size growth of Slovak 10Y yields
from September’s 1.6% to 2.3% at the end of 2015. A downside risk is a
milder development in the Eurozone. In contrast, should the state miss the
57% of GDP debt threshold this year and then renege on the balanced budget
(e.g. if the Parliament significantly alters the proposal), this could put some
extra pressure on yields. However, we see the latter as a low-probability
scenario. Overall, the risks to our forecast are probably skewed to the
downside (milder growth of yields).
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 15
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Alen Kovac
Chief Economist of Erste Bank Croatia
Slovenia
Supply and demand factors
Public debt expected to stabilize
0
-2
-4
-6
-8
-10
-12
-14
-16
90
80
70
60
50
40
30
20
10
0
2009 2010 2011 2012 2013 2014f 2015f
Following a more demanding funding profile in 2014 (gross financing needs at
approx. 14.5% of GDP), 2015 looks more comfortable, with the figure around
the 10% of GDP mark. On top of the approx. EUR 2.5bn debt rollover needs,
we are working with a 3.5% of GDP budget gap forecast. Financing
construction for 2014 was closed early in 2014, as the MoF was eager to
move and utilize favorable momentum following the successful round of
banking sector recaps and the supportive market environment. Consequently,
no surprises are anticipated looking towards YE14, as the anticipated
financing needs of around EUR 2bn represent approx. 40% of the available
cash buffer (robust 13.6% of GDP).
Govt. budget balance (% of GDP)
Public debt (% of GDP) RHS
On the supply side, the focus is expected to remain on market instruments (Tbills/bonds). The maturity profile indicates most action happening in 1Q (EUR
1.1bn maturing), and therefore we may again see the MoF opting to quickly
mitigate the risks and close the vast majority of the funding needs early in
2015 and aiming to keep the cash buffer high. With regard to the cash buffer,
Slovenia is currently financed well into 2015, with approx. 70% of gross
financing needs covered.
Source: SORS, MoF, EBC
As far as demand is concerned, two segments remain essential: banks on the
local market and foreign institutional investors that were steadily growing their
exposure. Local exposure, in our view, is not looking endangered, especially
as credit is set to remain weak and banks’ liquidity is fairly ample and
supportive towards sovereign exposure. Foreign demand looks a bit more
complex. Demand in recent quarters has first been fueled by the fairly
attractive yields and afterwards by subsiding banking sector risks allowing for
yields convergence. Going forward, the ongoing hunt for yields continues to
provide strong backing for financing actions and practically erases all the risks
concerning market access. Nevertheless, yields and new deal pricing should
be fine-tuned by the new government policy actions, with the spotlight on
fiscal austerity efforts and corporate restructuring, i.e. pursuing privatization
commitment. This is not only important from the risk profile side, but would
also support the financing side. The Ljubljana Airport privatization is wrapped
up and we expect approx. EUR 150mn impact in the near future. Other
important privatization stories may be Telecom Slovenia and NKBM (secondlargest bank in Slovenia) – although these have as of yet an uncertain
timeline and financial impact.
Strong yield convergence
8.5
IT
PT
ES
Other factors
SI
7.5
6.5
5.5
4.5
3.5
2.5
Jul-14
Sep-14
May-14
Jan-14
Mar-14
Nov-13
Sep-13
Jul-13
May-13
Jan-13
Mar-13
1.5
Political risks have subsided for the time-being, although the recent track
record suggests that we should take political stability with a grain of salt. The
reform agenda of the upcoming government remains unclear, although with
the pensioners (DeSUS) crucial for majority support in the parliament, we
remain slightly reserved. However, as far as yield expectations are
concerned, the risk profile is looking quite sound and policy is more of a
‘medium-term’ concern. The ECB is signaling further easing down the road,
and we see room for further yield compression towards 2.5-2.6% and a
subsequent gradual move upwards, owing to expected Bund trajectory.
Source: Bloomberg
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 16
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Turkey
Nilufer Sezgin
Chief Economist of Erste Securities
Istanbul
Supply and demand factors
Government debt redemption
outlook
25
Central govt. dept redemption (TRY bn)
Payment
projections
Payments
20
15
10
5
0
External debt*
Although the Treasury planned to issue TRY 135bn (8% of GDP) in domestic
debt instruments in 2014, we calculate that the realization will be some TRY
10bn short of that amount. The Treasury is set to complete 81% of the whole
year’s targeted domestic borrowing as of 3Q, with the debt roll-over ratio at
81% surfacing significantly below the planned 86%. The Treasury will
probably issue TRY 16.5bn (1% of GDP) more domestic debt in 4Q, covering
76% of the redemptions. This is even less than half of the previous quarters’
issue size, meaning that the supply side will be unlikely to put pressure on
yields. The lower than expected issue size this year is related to the solid
fiscal performance. Although the government was planning to produce a 1.9%
budget deficit by the end of the year, the deficit is still limited at 1.3% as of
August. Even if the government opts for some fiscal expansion in 4Q, the
cash buffer could prevent any increase in the roll-over.
Domestic debt
There will be a more material drop in the issue size in 2015, as the total year’s
domestic debt redemption will be 40% lower than in 2014. This decline will
especially be felt in 2H15. Although the exact impact of this decline should
depend on the planned roll-over ratio, the drop in the fresh issue size should
help tame the upside pressure on yields, especially if non-residents’ appetite
for bonds remain low. Foreign investors have not been net buyers in the bond
market YTD and their share remained stable vs. 2013 at around 22%.
* External debt payments are shown in
TRY based on a constant USD/TRY of
2.20
For the hard currency bonds, the Treasury will be completing (or even slightly
surpassing) this year’s USD 6.5bn (0.08% of GDP) Eurobond issue target as
of 3Q with the pending Samurai bond mandate. Nevertheless, the Treasury
may plan to tap international markets with a new issue through the end of the
year for pre-financing of 2015. Foreign appetite for Eurobonds has been
rather limited this year, with a net inflow of a tiny USD 154mn.
Real interest rate vs. inflation
gap
14
Real Interest Rate* (%)
12
Gap between inflation and target
10
8
6
E
r
s
t
e
F
o
r
e
c
a
s
t
4
2
0
-2
-4
-6
Jan-04
Other factors
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
* The real interest rate is the CBT’s
average funding cost discounted by the 12month forward-looking inflation expectation
The global interest rate outlook, the inflation trend in Turkey and the monetary
policy together will be the main determinants of yields in the next few
quarters. We expect only a mild decline in inflation in 4Q, to 9%, from the
current 9.4%. Moreover, the risk appetite could be weak, as markets become
more preoccupied with the Fed’s exit strategy. Therefore, we expect the twoyear bond yield to remain elevated at 9% as of the end of the year. Inflation is
set to drop more visibly starting from 1Q15, which could open room for some
decline in yields towards 8.8%, but we are nevertheless cautious about 2Q15,
when the Fed’s first rate hike is expected to come and when Turkey will
probably be going through general elections. We believe that yields could go
up to 9.4% by 2Q15, but relief back towards 9% is very likely for the
remaining part of the year, as the decline in inflation acts as a buffer to
prevent nominal yields from rising, despite the higher real interest rate
pressure globally. We continue to incorporate another 25bp policy rate cut for
4Q14, while we do not foresee any rate change in 2015. However, we believe
that the CBT should rely on liquidity tightening and lift the funding cost to
above the policy rate during 2015.
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 17
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Forecasts
Governm ent bond yields
current 2014Q4 2015Q1 2015Q2 2015Q3
Croatia 7Y
3.59
3.50
3.50
3.75
3.75
Czech Rep. 10Y
1.12
1.11
1.15
1.19
1.22
spread (bps)
22
1
-25
-31
-48
Hungary 10Y
4.58
4.80
4.86
4.95
5.04
spread (bps)
368
370
346
345
334
Poland 10Y
2.97
3.00
3.10
3.20
3.45
spread (bps)
207
190
170
170
175 FX
current 2014Q4 2015Q1 2015Q2 2015Q3
Rom ania 5Y
3.40
4.10
3.85
3.75
3.70
7.64
7.65
7.65
7.55
7.60
Slovakia 10Y
1.45
1.80
2.10
2.20
2.25 EURHRK
forw ards
7.75
7.85
7.84
7.90
spread (bps)
55
70
70
70
55
27.47
27.50
27.50
27.50
27.50
Slovenia 10Y
2.58
2.70
2.90
3.00
3.20 EURCZK
forw ards
27.37
27.22
27.05
26.98
spread (bps)
167
160
150
150
150
309.8
307.0
311.0
310.0
310.0
Serbia 10Y
5.15
4.75
5.00
5.00
5.00 EURHUF
forw ards
310.6
311.4
312.4
313.9
spread (bps)
425
365
360
350
330
4.18
4.16
4.15
4.13
4.09
Turkey 2Y
9.55
9.05
8.79
9.41
8.99 EURPLN
forw ards
4.20
4.21
4.23
4.25
Germ any 10Y
0.90
1.10
1.40
1.50
1.70
EURRON
4.41
4.50
4.47
4.46
4.45
3M Money Market Rate
forw ards
4.44
4.46
4.48
4.51
current 2014Q4 2015Q1 2015Q2 2015Q3
EURRSD
118.9
117.0
117.5
118.0
118.5
Croatia
1.16
0.85
0.85
0.85
0.90
forw ards
3M forw ards
USDTRY
2.28
2.23
2.27
2.31
2.35
Czech Republic
0.35
0.35
0.34
0.33
0.32
forw ards
2.3
2.4
2.4
2.5
3M forw ards
0.33
0.32
0.32
0.36
EURUSD
1.26
1.24
1.22
1.20
1.20
Hungary
2.09
2.10
2.20
2.20
2.30
3M forw ards
2.18
2.27
2.33
2.37 Key Interest Rate
Poland
2.27
1.95
1.95
2.00
2.00
current 2014Q4 2015Q1 2015Q2 2015Q3
3M forw ards
1.87
1.80
1.82
1.86 Croatia
6.00
6.00
6.00
6.00
6.00
Rom ania
3.01
2.60
2.50
2.50
2.50 Czech Republic
0.05
0.05
0.05
0.05
0.05
3M forw ards
2.71
2.42
2.23
2.57 Hungary
2.10
2.10
2.10
2.10
2.10
Serbia
7.78
7.50
7.50
7.50
7.50 Poland
2.50
1.75
1.75
1.75
1.75
3.00
3.00
3.00
3.00
3.00
3M forw ards
- Rom ania
8.50
8.00
8.00
8.00
8.00
Turkey
10.66
8.75
8.75
9.00
9.25 Serbia
8.25
8.00
8.00
8.00
8.00
3M forw ards
11.01
10.95
10.60
10.02 Turkey
0.05
0.05
0.05
0.05
0.05
Eurozone
0.08
0.15
0.15
0.15
0.15 Eurozone
Real GDP grow th (%) 2013 2014f 2015f 2016f
Croatia
-0.9 -0.5 0.0
0.8
Czech Republic
-0.9 2.5
2.7
2.7
Hungary
1.1
3.3
2.3
1.6
Poland
1.6
3.1
3.0
3.6
Romania
3.5
2.3
3.3
3.5
Serbia
2.4 -0.5 1.0
2.0
Slovakia
0.9
2.2
2.5
3.0
Slovenia
-1.1 1.4
1.4
1.6
Turkey
4.1
3.4
4.0
5.0
CEE7 average
1.2
2.7
2.8
3.1
CEE7+Turkey
2.3
2.9
3.2
3.8
Public debt (% of GDP 2013 2014f 2015f 2016f
Croatia
67.4 73.4 77.4 80.3
Czech Republic
46.0 44.8 43.1 43.0
Hungary
79.2 79.1 78.8 78.2
Poland
57.0 48.8 50.1 49.5
Romania
39.1 39.7 40.3 40.8
Serbia
64.4 71.4 73.3 74.5
Slovakia
55.4 56.8 56.0 55.2
Slovenia
71.7 80.8 82.1 82.4
Turkey
36.2 35.4 33.8 32.1
CEE7 average
58.2 55.1 55.5 55.2
CEE7+Turkey
48.0 46.0 45.8 44.5
Average inflation (%) 2013 2014f 2015f 2016f
Croatia
2.3
0.2
1.2
2.0
Czech Republic
1.4
0.5
2.1
1.9
Hungary
1.7
0.1
3.0
3.6
Poland
0.9
0.1
0.9
1.8
2.9
Romania
4.0
1.3
2.8
Serbia
7.9
2.4
4.3
5.0
Slovakia
1.4
0.5
1.5
2.3
Slovenia
1.8
0.3
0.8
1.4
Turkey
7.5
9.0
6.9
6.0
1.8
0.4
1.7
2.3
CEE7 average
4.0
3.8
3.7
3.8
CEE7+Turkey
C/A (%GDP)
2013 2014f 2015f 2016f
Croatia
0.9
1.0
1.4
1.0
Czech Republic
-1.4 0.0
1.4
1.2
Hungary
4.2
4.1
3.2
2.2
Poland
-1.5 -1.1 1.6
-2.4
Romania
-1.1 -1.4 -1.6
-1.8
Serbia
-6.5 -6.9 -6.7
-6.8
Slovakia
2.1
2.9
2.6
2.5
Slovenia
6.3
6.2
6.6
7.0
Turkey
-7.9 -6.1 -6.4
-6.3
CEE7 average
-0.2 0.2
1.5
-0.5
CEE7+Turkey
-3.3 -2.3 -1.6
-2.8
Unem ploym ent (%) 2013 2014f 2015f 2016f
Croatia
17.3 18.0 18.5 18.8
Czech Republic
7.0
6.7
6.3
5.9
Hungary
10.2 7.8
7.3
7.0
Poland
13.9 12.5 11.9 11.7
Romania
7.2
7.2
7.1
7.0
Serbia
22.1 21.8 21.3 20.7
Slovakia
14.2 13.5 13.2 12.9
Slovenia
10.1 10.1 9.9
9.7
Turkey
9.7
9.8
9.6
9.2
CEE7 average
11.9 11.0 10.6 10.3
CEE7+Turkey
10.8 10.3 10.0
9.6
Budget Balance (%GD 2013 2014f 2015f 2016f
Croatia
-4.9 -5.5 -4.5 -4.0
Czech Republic
-1.5 -1.7 -2.0 -1.8
Hungary
-2.4 -2.7 -2.9 -2.9
Poland
-4.4 4.8 -3.0 -2.5
Romania
-2.3 -2.7 -3.0 -3.0
Serbia
-5.0 -7.0 -5.0 -4.5
Slovakia
-2.8 -2.6 -2.5 -1.5
Slovenia
-14.7 -4.5 -3.5 -3.0
Turkey
-1.2 -2.2 -1.8 -1.3
CEE7 average
-3.8 0.4 -3.0 -2.6
CEE7+Turkey
-2.7 -0.7 -2.4 -2.0
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 18
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Statistical Appendix
Weights in Erste CEE Indices
Erste CEE Local Currency Index
HR
CZ
HU
PL
RO
3%
22%
17%
49%
9%
weights
(2Q14)
CZ
9%
HR
8%
Erste CEE Eurobond Index
PL
HU
RO
18%
40%
11%
SK
6%
SI
8%
Debt, deficit and growth figures (percent of GDP)
Croatia
100
80
Czech Republic
10
100
7.8
90
6.4
5.0
70
4.9
7
5.5
4.5
60
Public debt to
GDP (lhs)
4
50
67.4
Budget deficit
30
70
7
4.7
3.2
51.9
44.9
-2
1.5
10
-5
38.4
41.4
90
80
70
46.0
44.8
Public debt to
GDP (lhs)
50
40
55.6
-2
38.0
34.7
39.1
80
7
4.5
Public debt to
GDP (lhs)
2.5 4
Budget deficit
1
43.6
52.7
4.7
4.9
80
56.0
Budget deficit
40
1
44.5
47.2
10
7
4.0
-5
2010 2011 2012 2013 2014 2015
-2
60.0
64.4
71.4
73.3
-5
Turkey
100
20
4.5
3.5
Public debt to
GDP (lhs)
4
80
15
70
60
Public debt to
GDP (lhs)
10
50
40
54.4
71.7
1
Budget deficit
40
3.6
5
1.3
30
20
10
0
Budget deficit
90
6.4
30
-2
Public debt to
GDP (lhs)
2010 2011 2012 2013 2014 2015
10
70
5.0
0
14.7
5.9
7
5.0
4
10
50
40
41.0
70
20
-2
40.3
39.7
60
50
55.4
80
50
1
-5
90
56.8
10
7.0
6.5
60
3.0
2.7
100
7.5
30
-5
Slovenia
10
2.6
Public debt to
GDP (lhs)
2010 2011 2012 2013 2014 2015
Slovakia
100
-2
79.1
79.8
100
4
3.0
0
2010 2011 2012 2013 2014 2015
2.8
-4.2
0
30
20
0
4.8
82.2
Budget deficit
78.8
2010 2011 2012 2013 2014 2015
7
2.3
30.5
1
79.2
90
5.5
2.9
Public debt to
GDP (lhs)
4
Serbia
6.8
50
10
60
82.1
10
10
60
2.7
2.4
40
20
30
50.1
10
70
2.2
50
Budget deficit
-5
40
48.8
7
4.4
60
43.1
70
60
57.0
70
Romania
80
20
46.2
100
90
56.2
80
2010 2011 2012 2013 2014 2015
Poland
54.9
10
30
0
100
90
2.0
1
1.7
40
2010 2011 2012 2013 2014 2015
20
Public debt to
GDP (lhs)
4
20
56.0
0
30
4.2
30
77.4
20
10
80
50
1
100
90
60
73.4
40
Hungary
10
90
38.7
47.1
-2
80.8
82.1
0
39.1
2.1
36.2
10
-5
2010 2011 2012 2013 2014 2015
20
42.3
1.2
36.2
2.2
1.8
35.4
33.8
0
Budget deficit
0
-5
2010 2011 2012 2013 2014 2015
Source: Erste Group Research
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 19
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Financing needs in 2014 and cash buffers
Croatia
Hungary
Czech Republic
25%
25%
25%
Cash Buffer
20%
Maturities
Maturities
Deficit
15%
Cash Buffer
Cash Buffer
20%
20%
Deficit
15%
15%
Maturities
Maturities
10%
10%
5%
0%
10%
Maturities
5%
Cash
deficit
Cash
buffer
0%
Cash
buffer
Cash
deficit
Cash Buffer
Maturities
25%
Cash Buffer
Cash Buffer
20%
Maturities
Deficit
20%
Deficit
15%
15%
10%
10%
10%
0%
5%
Cash
buffer
0%
Maturities
Cash
deficit
Cash
buffer
Maturities
20%
15%
10%
10%
0%
Cash
deficit
Turkey
Maturities
Maturities
Deficit
10%
5%
Cash
buffer
Cash Buffer
20%
15%
Maturities
Maturities
0%
Deficit
15%
0%
Cash
buffer
Cash
deficit
Cash Buffer
Deficit
5%
Maturities
25%
25%
Cash Buffer
20%
5%
Slovenia
Slovakia
25%
Maturities
Deficit
15%
Maturities
Cash
deficit
Cash
buffer
Cash
deficit
Serbia
Romania
25%
20%
5%
0%
Poland
25%
5%
Maturities
Deficit
Cash
deficit
Cash
buffer
5%
Maturities
0%
Cash
deficit
Cash
buffer
Note: Percent of forecasted 2014 GDP
Source: Bloomberg, Erste Group Research
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 20
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Redemptions in next 12 months by type and currency of issue
Croatia
GDP
25%
FX
LCY
20%
15%
10%
5%
9.5%
8.0%
0.0%
8.0%
9.5%
0%
Type
Currency
T-Bills
T-Bonds
Eurobonds
15%
Loans
10%
5%
2.9%
0.7%
0.7%
2.9%
Type
Currency
T-Bills
T-Bonds
Eurobonds
Slovakia
GDP
25%
15%
Loans
10%
T-Bills
T-Bonds
5%
4.3%
Type
Currency
15%
Loans
10%
5.2%
5%
3.1%
1.0%
0%
Type
Eurobonds
1.0%
8.3%
Currency
T-Bills
T-Bonds
Eurobonds
15%
Loans
10%
1.8%
2.1%
2.9%
0%
Type
2.9%
3.9%
Currency
20%
15%
5%
T-Bills
T-Bonds
Eurobonds
Slovenia
25%
10%
20%
2.4%
6.9%
0%
Type
Currency
1.2%
15%
10%
5%
0%
15.3%
3.1%
1.2%
Type
15%
0%
Loans
0.4%
5.4%
3.3%
Type
FX
LCY
25%
Loans
15%
T-Bills
T-Bonds
10%
3.3%
5.8%
Currency
0%
T-Bills
T-Bonds
Eurobonds
Turkey
FX
LCY
20%
5%
Eurobonds
FX
LCY
20%
5%
T-Bills
T-Bonds
Serbia
GDP
Eurobonds
Currency
25%
10%
FX
LCY
Loans
12.3%
GDP
FX
LCY
20%
5%
25%
Romania
25%
Hungary
GDP
FX
LCY
20%
GDP
FX
LCY
20%
Czech Republic
GDP
FX
LCY
20%
0%
Loans
Poland
GDP
25%
0%
GDP
25%
Loans
0.0%
1.1%
7.2%
7.2%
1.1%
Type
Currency
T-Bills
T-Bonds
Eurobonds
Source: Bloomberg, Erste Group Research
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 21
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Holding structure of local currency debt securities
Croatia
Hungary
Czech Republic
100%
100%
100%
80%
80%
80%
60%
60%
60%
40%
40%
40%
20%
20%
20%
0%
1Q12
3Q12
1Q13
Non-residents
3Q13
Local banks
1Q14
Other
0%
1Q12
3Q12
1Q13
Non-residents
Poland
3Q13
Local banks
1Q14
0%
1Q12
Romania
100%
80%
80%
80%
60%
60%
60%
40%
40%
40%
20%
20%
20%
3Q12
1Q13
Non-residents
3Q13
Local banks
1Q14
Other
3Q12
Non-residents
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
3Q12
Non-residents
1Q13
3Q13
Local banks
Local banks
1Q14
Other
3Q13
Local banks
1Q14
Other
0%
1Q12
3Q12
Non-residents
1Q13
3Q13
Local banks
1Q14
Other
Turkey
Slovenia
0%
1Q12
1Q13
3Q13
Slovakia
100%
0%
1Q12
1Q13
Non-residents
Other
100%
0%
1Q12
3Q12
1Q14
Other
0%
1Q12
3Q12
Non-residents
1Q13
3Q13
Local banks
1Q14
Other
Source: Country MinFins, Debt Management Aencies, Erste Group Research
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 22
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Annual redemptions in LCY and FX until 2020
Croatia
Hungary
Czech Republic
10,000
50,000
20,000
8,000
40,000
15,000
6,000
30,000
20,000
10,000
10,000
LCY
Total
5,000
Total
Romania
5,000
20,000
4,000
10,000
LCY
2,000
LCY
Total
5,000
Total
1,000
Total
LCY
10,000
LCY
10,000
Total
5,000
Total
0
Rest
2020
2019
2018
LCY
50,000
Total
Rest
2020
2019
2018
2017
Rest
2020
2019
2018
2017
2016
2015
0
2014
Rest
2020
2019
2018
0
2017
100,000
15,000
20,000
2016
20,000
2014
30,000
Turkey
150,000
2015
25,000
2017
2016
Slovenia
Slovakia
40,000
2016
2015
2014
Rest
2020
2019
2018
2017
2016
2015
0
2014
Rest
2020
2019
2018
2017
2016
2015
2014
Rest
3,000
LCY
0
2015
2020
Serbia
25,000
15,000
2014
2019
2014
Rest
2020
2019
2018
2017
2016
2015
2014
Poland
120,000
100,000
80,000
60,000
40,000
20,000
0
2018
0
0
Rest
2020
2019
2018
2017
2016
2015
2014
0
LCY
2017
Total
2016
LCY
2,000
2015
4,000
Note: EURmn
Source: Bloomberg, Erste Group Research
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 23
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Redemptions in next 12 months (monthly breakdown)
Hungary
Czech Republic
T-Bonds
Sep-15
Aug-15
Jul-15
Jun-15
Mar-15
Feb-15
Jan-15
Dec-14
Oct-14
T-Bills
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Loans
Eurobonds
T-Bonds
Sep-15
Aug-15
Jul-15
Jun-15
Feb-15
Jan-15
Dec-14
Nov-14
T-Bills
Oct-14
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
T-Bills
Feb-15
Sep-15
Eurobonds
Nov-14
Sep-15
Aug-15
T-Bonds
Jan-15
Jul-15
Oct-14
Oct-15
Sep-15
Jul-15
Jun-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Eurobonds
Dec-14
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
T-Bills
Loans
Oct-14
T-Bonds
Mar-15
Loans
Turkey
1,600
1,400
1,200
1,000
800
600
400
200
0
Nov-14
Eurobonds
Feb-15
800
700
600
500
400
300
200
100
0
Slovenia
Loans
Jan-15
Mar-15
Feb-15
T-Bills
Slovakia
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Dec-14
Apr-15
T-Bonds
Oct-14
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
Dec-14
Oct-14
Nov-14
T-Bills
Eurobonds
Jan-15
T-Bonds
Loans
Dec-14
Eurobonds
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Nov-14
Loans
Oct-14
Serbia
Romania
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Nov-14
May-15
Mar-15
Jan-15
Feb-15
Dec-14
Nov-14
Sep-15
Jul-15
Poland
T-Bills
Aug-15
500
0
Aug-15
Jun-15
Apr-15
May-15
Mar-15
Jan-15
Feb-15
Dec-14
Oct-14
Nov-14
0
T-Bonds
May-15
500
T-Bills
Jun-15
1,000
T-Bills
Eurobonds
Apr-15
T-Bonds
May-15
1,500
Loans
Apr-15
1,000
Eurobonds
May-15
T-Bonds
Loans
Mar-15
2,000
Apr-15
2,500
Eurobonds
Jan-15
1,500
Loans
Feb-15
2,000
Dec-14
2,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Nov-14
3,000
Mar-15
Croatia
3,000
Note: EURmn
Source: Bloomberg, Erste Group Research
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 24
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Credit ratings of the sovereign
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
B-
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
B-
Croatia
Moodys
S&P
Fitch
Investment grade
Poland
Moodys
S&P
Fitch
Investment grade
Slovakia
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
B-
Moodys
S&P
Fitch
Investment grade
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
B-
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
B-
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
B-
Czech Republic
Investment grade
Moodys
S&P
Fitch
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
B-
Hungary
Moodys
S&P
Fitch
Investment grade
Romania
Moodys
S&P
Fitch
Investment grade
Serbia
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
B-
Slovenia
Moodys
S&P
Fitch
Investment grade
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
B-
Moodys
S&P
Fitch
Investment grade
Turkey
Moodys
S&P
Fitch
Investment grade
Source: Bloomberg, Erste Group Research
Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 25
Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
Contacts
Group Research
Head of Group Research
Friedrich Mostböck, CEFA
Major Markets & Credit Research
Head: Gudrun Egger, CEFA
Ralf Burchert (Agency Analyst)
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Christian Enger, CFA (Covered Bonds)
Margarita Grushanina (Economist AT, CHF)
Alihan Karadagoglu (Senior Analyst Corporate Bonds)
Peter Kaufmann, CFA (Corporate Bonds)
Stephan Lingnau (International Equities)
Rainer Singer (Senior Economist Euro, US)
Elena Statelov, CIIA (Corporate Bonds)
Gerald Walek, CFA (Economist Euro)
Katharina Böhm-Klamt (Quantitative Analyst Euro)
Macro/Fixed Income Research CEE
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Chief Analyst: Günther Artner, CFA (CEE Equities)
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Editor Research CEE
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Deniz Gurgen
Research Croatia/Serbia
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Research Hungary
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Research Romania
Chief Economist, Director: Radu Craciun
Head: Mihai Caruntu (Equity)
Head: Dumitru Dulgheru (Fixed income)
Chief Analyst: Eugen Sinca (Fixed income)
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Research Turkey
Head: Can Yurtcan
Evrim Dairecioglu (Equity)
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Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
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Erste Group Research
CEE Special Report | Fixed Income | CEE
2 October 2013
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Erste Group Research – CEE Bond Market Outlook 4Q2014 – CEE Eurobonds – The ‘Sweet Spot’
Page 27