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bne May 2017 Companies & Markets I 17
Visegrad sovereign debt rush set to fade
Tim Gosling in Prague
Visegrad sovereigns have made hay in early 2017, push- ing debt issues while flows of cheap money, improved economic prospects, and falling perceptions of geopoliti- cal risk persist. However, borrowing volumes are likely to dip through the year.
Debt issues came thick and fast in the first quarter of the year, and sovereigns have fulfilled large chunks of their full year bor- rowing plans already. The effort has been helped by relatively strong fiscal positions across Visegrad and current accounts that are either close to balance or in impressive surplus.
Almost all CEE countries were either at or above their propor- tional issuance plans by the end of March, while cash buffers were also substantial in many cases, note Juraj Kotian and Zoltan Arokszallasi at Erste Group in a recent report. The Czech Republic, Poland and Slovakia are at or above 50% of their annual issuance plans.
The European Central Bank’s bond-buying programme con- tinues to drive markets by propping up demand. The policy is expected to remain in place to the end of 2017, helping coun- terbalance rising risk in the EU from elections in France and Germany, and rate hikes in the US.
Meanwhile, a surge in inflation around the turn of the year has raised yields less than expected. The market appears to agree with the view expressed by central banks across the region that price growth is largely driven by stabilised oil prices and the low base from 2016, and that the momentum will continue to fade after the pullback seen in March.
Investors, therefore, are convinced that Hungarian and Polish monetary policy will not tighten through 2017.
“Investor demand for V4 bonds in [local currency] remains in place as decent risk premia (vs bunds and treasuries) were re- established in the fourth quarter of 2016 and have been main- tained through the first phase of the global reflation trade,” points out Gunter Deuber at Raiffeisen Bank International. “As we have seen a large parts of the reflation story already unfolding locally and inside the euro area, downsides remain limited from here.”
Yet inflation is clearly back following three years or so of ultra-low price rises or deflation. With the Eurozone economy accelerating also, the ECB is set to raise discussion of its plans to taper the bond-buying programme through the year.
This suggests issuance will decline in the coming months. That should help keep a lid on yields in Visegrad, although spreads to bunds and nominal yields are expected to rise around the turn of the year.
“Sovereigns are aware of the fact that current generous market conditions are unlikely to prevail much into 2018 or so,” adds Deuber. “Hence, we see a lot of pre-funding and also ambitions to place ultra-long bonds like in case of Slovakia recently.”
While Slovakia - as the only member of the Eurozone in Viseg- rad - remains an exception, the rest of the region continues to concentrate on local currency debt.
While Hungary has struggled to gain much traction in reduc- ing its overall state debt burden – at around 75% of GDP it’s by far the highest in Visegrad or even CEE – Budapest has successfully suppressed the ratio of foreign currency debt in its portfolio. The reduction in exposure to external shocks was key in earning Hungary an escape from ‘junk’ at the three major ratings agencies last year.
“Debt management agencies want to use the current generous conditions to develop local markets further and to decrease foreign participation via external bonds or non-resident hold- ings,” says Deuber.
The Magyar Nemzeti Bank continues, meanwhile, to use unconventional monetary policy to raise banking liquidity and drive lenders to use it to buy government debt. Still, politi-
cal risk, and the heightened deficit and debt load keep yields elevated compared to peers. The 10-year benchmark sits at around 3.3%, the spread to bunds having risen by approxi- mately 20bp to 330 through the first quarter.
Poland is performing a similar trick to quash yields, wield- ing the bank tax introduced in February 2016. Local debt is exempt from the asset base used to calculate the tax. Still, the
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