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18 I Companies & Markets bne May 2017
combustible nature of the PiS government drove down the long-standing spread between Polish and Hungarian yields in 2016, to hand forint bonds a 10bp advantage currently.
Poland is unlikely to see that reverse this year. Analysts at BZWBK worry that the bank tax may have a greater impact on the real economy than thought, noting that it has “incentivised banks to restructure their portfolios away from investing into the private sector and instead towards just sitting on a growing pile of government debt”.
Erste expects to see the yield on Hungary’s benchmark
move out towards 3.7% by the end of the year, but driven by Warsaw’s ongoing fight with the EU, upcoming impact on state finances of the reduction of the retirement age, and the potential for a downgrade from Moody’s, the Polish equivalent is forecast at 4%.
Although also driven by local monetary policy issues, the Czech Republic – long the safe haven of the region – illustrates the effects of political risk and looser fiscal policy in neigh- bouring countries. Yields on the Czech benchmark are forecast to inch 0.02bp lower through 2017 to finish at 0.83%.
“Sovereigns are aware of the fact that current generous market conditions are unlikely to prevail much into 2018 or so”
However, shorter maturity bonds and T-bills look set for a sharp hike. Czech debt up to 3-years has traded at negative yield for over a year on the back of the central bank’s cap on the koruna. That policy was scrapped in early April.
The bulk of the huge volume of speculative capital that arrived in a bet on a jump for the currency – the CNB had been forced to spend as much as €80bn in interventions since late 2013 –
is thought likely to be looking for an exit for some time.
“The sale of bonds with shorter maturities by foreign inves- tors will lead to upward pressure at the short end of the yield curve,” predict Kotian and Arokszallasi. “However, many foreign investors will have problems finding an appropriate counterparty at a favourable exchange rate (capital waiting for the exit is much higher than the natural demand for koru- nas). For this reason, we expect a significant share of foreign investors to have to wait for a couple of quarters or even years, which will let yields flatten only gradually.”
However, the Czechs continue to offer greater stability than their peers in political, fiscal and economic terms. Elections in October mean the budget, which recorded a record high surplus last year, is set to return to deficit, but that should not affect the outlook.
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Esrte predicts overall gross financing needs for 2017 at CZK- 230bn-270bn (€8.6bn-10bn), the majority to cover redemp- tions. The end of the koruna cap should see a change in strat- egy from the Ministry of Finance, with longer dated bonds to the fore after heavy short-dated and T-bill issuance in recent months as it chased negative yields. The Austrian bank’s analysts expect issuance to drop by half compared with the first quarter to around CZK100bn for the rest of the year, with proceeds to cover CZK210bn in redemptions from short-dated issues mainly.
Those conditions make foreign-currency issues from Prague very unlikely. In fact, local currency redemptions dominate in all Visegrad countries.
Meanwhile, Slovakia, which has also enjoyed negative-yield short-dated debt for over a year, is due to redeem a total of €7.2bn this year. While, the governing coalition has offered signs that it could slow fiscal consolidation, the deficit has still been reduced towards just 1% or so of GDP, and plans are in place to continue towards a balanced budget in 2019.
However, with the ECB bond-buying programme due to be unwound, yields are set to rise strongly in 2017, Erste suggests. The 10-year benchmark is forecast to rise from early April’s 1% to 1.4% by the end of the year.
There may be exceptions to the local currency concentration, however. It would be no surprise if Poland – and to a lesser extent Hungary – launched foreign currency issues this year.
Poland is expected to offer another issue of CYN3bn in Chinese yuan following last year’s debut Panda bond – a clear effort
to help build ties with Beijing as part of the ongoing regional competition to attract investment and trade with the eastern giant. Meanwhile, Warsaw has Eurobonds denominated in USD, CHF and JPY maturing later this year, and finance minis- try officials say issues are being mulled.
Warsaw also became the first sovereign to sell green bonds – which direct proceeds to investment in environmental projects – in December. Officials suggest another such issue could also be in the pipeline.
Hungary is, meanwhile, flirting with suggestions of a euro- denominated paper. However, the MNB and finance ministry continue a highly public fight over such a move, with the central bank keen to maintain its push to reduce external debt, having quashed it to around 25% of gross state debt by the end of last year.
“Hungary has always had FX issuance in its annual plans, but has failed to conduct any for years,” note the Erste analysts. “It remains to be seen whether Hungary will opt for a Eurobond sale. Even if the planned EUR1bn sale is conducted, the nomi- nal outstanding stock of FX debt will fall, given that redemp- tions amount to around €2.4bn this year.”