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CEE Bond Outlook 2012

CEE Bond Outlook 2012

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Published by: Ciocoiu Vlad Andrei on Feb 06, 2012
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Erste Group Research – CEE Bond Outlook 2012
Page 1
Erste Group Research
Special Report | Fixed Income | Central and Eastern Europe06 February 2012
CEE Bond Market Outlook 2012
CEE government bonds provide a reasonable reward to investors at a time whengovernment bonds of the core euro area countries have become extremelyexpensive and bear very low yields (if any). CEE countries have, in general, ahigher threshold for the yields they can afford to pay on their debt, withouttriggering the debt spiral.
Juraj Kotian
Sovereign ratings
S&PFitchMoody'sCroatiaBBB-BBB-Baa3Czech RepublicAA-A+A1HungaryBB+BB+Ba1PolandA-A-A2RomaniaBB+BBB-Baa3SlovakiaAA+A1
Source: Bloomberg 
Long-term yields (%)
current Dec-2012Croatia 7.7 7.5Czech Republic 3.2 4.0Hungary 8.8 7.9Poland 5.6 6.0Romania 7.2 7.2Slovakia 5.1 5.0
Source: Bloomberg, Erste Group Research
Implied critical yields (%)
average yield at which the interest costswould exceed 10% of government revenues
     1 .     82 .     53 .     3     3 .     44 .     0     4 .     15 .     0     5 .     1     5 .     3     5 .     66 .     0     6 .     26 .     9     7 .     17 .     5     7 .     7     7 .     78 .     6     1     0 .     0     1     0 .     2     1     0 .     7     1     1 .     4
     J    a    p    a    n     G    r    e    e    c    e     I    r    e     l    a    n     d     U    n     i     t    e     d     S     t    a     t    e    s     I     t    a     l    y     P    o    r     t    u    g    a     l     U     K     B    e     l    g     i    u    m     S    p    a     i    n     G    e    r    m    a    n    y     H    u    n    g    a    r    y     F    r    a    n    c    e     A    u    s     t    r     i    a     P    o     l    a    n     d     N    e     t     h    e    r     l    a    n     d    s     C    r    o    a     t     i    a     S     l    o    v    a     k     i    a     T    u    r     k    e    y     C    z    e    c     h     R    e    p .     S     l    o    v    e    n     i    a     R    o    m    a    n     i    a     F     i    n     l    a    n     d
implied critical rateaverage interest on outstanding debt
Source: EC Autumn Forecasts, Erste GroupResearch
Find our full set of forecasts in our weeklyCEE Insights
The ongoing sovereign debt crisis in the Euro Area and increased riskaversion dented demand for CEE government securities atthe end of 2011.However, we have not seen any sizable sell-off comparable to the post-Lehman shock. Surprisingly, even Hungary, which lost its investment gradeand escalated disputes with the EU and IMF over controversial laws, did notwitness any massivesell-off.Governments in CEE6 (Croatia, the Czech Republic, Hungary, Poland,Romania, Slovakia) are also to continue in their fiscal consolidation thisyear and, after the reduction of the deficit from 6.4% in 2010 to anestimated 4.1% of GDP on averagein 2011, the deficit is to further shrink to3.6% of GDP on average in 2012.Interest rates will remain low both in the US and the Eurozone, plus thegenerous LTROs conducted by the ECB will keep demand for goviesstrong, especially for short-term securities. The ECB’s 3Y long-termrefinancing operation has obviously eased tensions in the Europeanbanking sector and reduced borrowing costs for governments, not only inthe Eurozone, but through improved sentiment also in CEE.Extension of the average maturity of outstanding debt is one of the mainreasons why debt agencies in CEE are looking abroad to issue Eurobonds.The average maturity of government securities still remains relatively shortin CEE, about four years on average, compared to about 6-7 years for major Euro Area countries. Poland, Romania, Turkey and Slovakia alreadytapped the foreign markets in January with Eurobonds and syndicated bondissues. The Czech Republic and Croatia could issue Eurobonds soon.The ratings of many CEE countries have been improving in relative termsagainst the widening group of downgraded Euro Area countries. Given thatmany funds and insurance companies have investment restrictions basedon sovereign ratings, the pool of countries in which they can invest hasbeenshrinking. The Czech Republic, Poland and Slovakia may benefit fromtheir relatively good rating and low level of both private and public debt.Extremely low yields have enabled many advanced countries to stay abovewater and service their high stock of debt without serious problems. But theturmoil in the Euro Area increased pressure on yield spreads and openeddiscussion about the yield level, which would still be affordable from thesolvency/liquidity point of view. The Czech, Romanian and Slovakgovernments have the biggest breathing space for spikes in yields amongCEE countries.
Erste Group Research
Special Report | Fixed Income | Central and Eastern Europe06 February 2012
Erste Group Research – CEE Bond Outlook 2012
Page 2
Supply of government securities in 2012
With the exception of Hungary and Croatia, CEE6 countries have beenadvancing in their fiscal consolidation. Although there is some slippage inthe pace of consolidation compared to their original plans in countries wheregeneral elections were held (Poland, Croatia in 4Q11) or will soon takeplace (Slovakia in March 2012), we have seen decisive action being takenby governments to curb the gap right after the elections (Poland).Governments in CEE6 are also to continue in their fiscal consolidation thisyear and, after the reduction of the deficit from 6.4% in 2010 to an estimated4.1% of GDP on average in 2011, the deficit is to further shrink to 3.6% of GDP on average in 2012. The newly-formed the six pack should strengthenbudget surveillance and thus make the consolidation process lessvulnerable to sudden turnarounds in politics in the years beyond 2012.
Fiscal deficit 2012F(% of GDP) Fiscal deficit in CEE6 (% of GDP)
     G    e    r    m    a    n    y     T    u    r     k    e    y     I     t    a     l    y     U     k    r    a     i    n    e     A    u    s     t    r     i    a     N    e     t     h    e    r     l    a    n     d    s     R    o    m    a    n     i    a     H    u    n    g    a    r    y     C    z    e    c     h     R    e    p .     P    o     l    a    n     d     S    e    r     b     i    a     B    e     l    g     i    u    m     S     l    o    v    a     k     i    a     C    r    o    a     t     i    a     F    r    a    n    c    e     S    p    a     i    n     U     K
     2     0     1     0     2     0     1     1     E     2     0     1     2     F
Source: EC Autumn Forecasts, Erste Group Research
When we translate the deficits into monetary terms under conservativeassumptions that governments will not raise money through the sale of stateassets, CEE6 governments would need to issue about EUR35bn of newdebt in 2012. That is a slightly lower volume than in 2011 and a relativelysmall portion compared to estimated net issuance in the Euro Area of aboutEUR 300bn, excluding Ireland, Greece and Portugal, which are under theIMF program. French government securities will contribute about one thirdof overall net issuance in the Euro Area in 2012.On top of the new debt, CEE6 governments have to rollover redeeming debtworth EUR 72bn (about 8% GDP on average), predominantly in the localcurrency. A more challenging situation will be the rollover of maturing Italian,Spanish, French and Belgium debt worth 13.5-20.5% of their GDP, whereany slippage in fiscal consolidation may be penalized by a reduced rollover,especially by non-residents. Of course, the ECB’s generous LTROs willboost demand, but mainly at the short-end.
Juraj Kotian
Fiscal consolidation advancesfurther in 2012Treasury funding needs shouldtotal EUR 35bn in CEE6Rollover of redeeming debt willbe challenging mainly in EuroArea
Erste Group Research
Special Report | Fixed Income | Central and Eastern Europe06 February 2012
Erste Group Research – CEE Bond Outlook 2012
Page 3
Redemptions in 2012 (% of GDP)
     U     k    r    a     i    n    e     A    u    s     t    r     i    a     T    u    r     k    e    y     S    e    r     b     i    a     C    r    o    a     t     i    a     U     K     P    o     l    a    n     d     S     l    o    v    a     k     i    a     R    o    m    a    n     i    a     G    e    r    m    a    n    y     H    u    n    g    a    r    y     C    z    e    c     h     R    e    p .     N    e     t     h    e    r     l    a    n     d    s     S    p    a     i    n     F    r    a    n    c    e     B    e     l    g     i    u    m     I     t    a     l    y
T-bills in LCYT-bonds in LCYFX debt
Source: EC Autumn Forecasts, Erste Group Research
In total, we assume the gross issuance of government securities in CEE6 tobe EUR 107bn (or 12% of GDP in average). From the perspective of theEuro Area sovereign debt crises, high gross issuance and strongdependence on demand from non-residents represents the major rollover risk. High combinations of these two factors are seen in Hungary and, fromthe Euro Area, in France and Belgium (if we do not count those countrieswhich are under the IMF program). However, the risks could materialize onlyif investors lose faith in the fiscal discipline of that country or any globalevent (i.e. a Greek default) hits sovereign debt as an asset class.
Estimated gross issuance (% of GDP)
     U     k    r    a     i    n    e     T    u    r     k    e    y     A    u    s     t    r     i    a     G    e    r    m    a    n    y     P    o     l    a    n     d     S    e    r     b     i    a     R    o    m    a    n     i    a     C    r    o    a     t     i    a     S     l    o    v    a     k     i    a     H    u    n    g    a    r    y     C    z    e    c     h     R    e    p .     N    e     t     h    e    r     l    a    n     d    s     U     K     F    r    a    n    c    e     S    p    a     i    n     B    e     l    g     i    u    m     I     t    a     l    y
Redemptions in 2012 Fiscal deficits in 2012
Source: EC Autumn Forecasts, Erste Group Research
Hungary,France and Belgiumwill be watched carefully bymarkets due to their high grossissuance

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