CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

RS rates: In line with our and market expectations, at yesterday's rate setting meeting, the NBS continued with its wait-and-see tactics and kept the key rate at 8.5%. The official wording brought no surprises, as the weak dinar, international turbulence and delays on the fiscal front once again proved to be key factors behind the MPC decision. Also, official forecasts show that the mitigating effects of low agricultural prices and announced electricity price hikes will be pushing inflation back towards the middle of the target tolerance band, which is also in line with our YE forecast. Looking forward, provided that the government puts more effort into the fiscal sphere and the IMF talks end with a binding (standby) arrangement, we see some space for additional easing; we thus keep our YE forecast at 8%.

RO Bonds: Romania re-opened a T-bond issue maturing August 2016 and raised RON 400 m, as planned. The yield edged up 15 bps to 2.8% compared to the previous auction held in late August, despite solid investor demand (the bid-to-cover ratio was 2.5). In a separate release, industrial output expanded at a slower pace in July (+6.1 y/y s.a vs 11.5% in the previous month), despite monthly exports reaching a record high in July. A surprise fall in August inflation and the disappointing GDP data could trigger additional monetary easing in the following months. We see the central bank cutting the key rate another 25 bps at the September meeting. We reaffirm our year-end inflation and 5-year ROMGB yield forecasts for this year at 2.2% and 4.1%, respectively.

HU Bonds: The Debt Management Agency decided yesterday to increase the amount sold at the 12M T-bill auction by HUF 10 bn. The original plan was to sell HUF 40 bn. Investors bid for HUF 85bn. The average yield came in at only 1.63%, 9 bps lower than at the auction held two weeks ago, and 1 bp below the secondary market level a day earlier. The policy rate is 2.1% at the moment, so the continuous decline of yields might signal that there is a lot of excess HUF liquidity in the system after the CB changed its 2-week policy tool into a deposit. At the auction of the 3Y floating bond, demand was also excessive which caused the Debt Management Agency to increase the allotted amount by HUF 10 bn to HUF 30 bn. Despite high investor demand in shorter maturities, we expect 10Y yields to climb to 4.8% at the end of this year. Demand for government bonds may decrease, as risks for converting FX loans to HUF could create increased demand for HUF funding from banks, which could lower the banking sector’s interest in purchasing HGBs (which was enhanced earlier by the central bank’s overhaul of the monetary policy framework).

TR Macro: The 12-month rolling C/A deficit narrowed to USD 48.5 bn (6.0% of GDP) in July from the previous month’s USD 52.1 bn (6.5% of GDP) on the back of the strong slump in the July foreign trade deficit due to lower gold imports as well as the rebalancing of domestic and external demand. External financing conditions were mostly positive in July. The data poses downside risks to our USD 49.5 bn year-end C/A deficit forecast. Fitch underlined in a conference yesterday that the large external deficit is a major vulnerability for Turkey, but the rating agency adopts a positive, albeit cautious view on Turkey. Fitch will disclose its official rating review for Turkey on October 3. We do not expect any rating downgrade, but an outlook cut remains a possibility. We continue to see the USD/TRY and the two-year government bond yield at 2.21 and 9%, respectively.

Traders’ Comments

CEE Fixed Income: Yields on CEE government bonds drifted higher in sympathy with the general up-tick in yields on USTs with no real catalyst. In fact, attention seems to be moving to next week‘s scheduled events (Scottish referendum, Fed meeting, Eurozone CPI) and today’s headlines are centering around what everybody already knew (further sanctions on Russia and retaliation).a