CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HU Fiscal: The Economic Ministry submitted the budget draft to the Budget Committee yesterday after the government had discussed it over the weekend. The document will be officially published shortly before Oct 31st when it will be submitted to the Parliament. However, some information has already been leaked about the budget. PM Orban said that by 2018 nobody will receive ‘income replacement benefits’ and Hungary will achieve ‘full employment’. Based on other leaked information, the government plans major restructuring in the healthcare and the education systems and also aims to lower the cost of public administration and increase military spending. There had already been rumours about these issues; Hungary spends only 0.8% of its GDP for military reasons vs. NATO's benchmark of 2% of GDP. Furthermore, Economic Minister Varga said earlier that the ratio of government spending to GDP has to drop to 45% from the current 50% level, suggesting a huge consolidation for the coming years. We will consider whether to modify our forecasts or not once the budget details are available.

HR Fiscal: Yesterday, the CBS published budget deficit and public debt figures for the 2010-2013 period in accordance with the new ESA2010 methodology. Though budget gaps were revised (-5.2% of GDP vs. previous - 4.9% for 2013), more significant were the changes in the public debt figures given the inclusion of debt related to state-owned motorway operators HAC and ARZ (approx. 9% of GDP). Public debt at the end of 2013 stood at 75.7% of GDP and according to the MoF projections is expected to reach 81.8% of GDP amid a 5.8% deficit in 2014. The expectations for 2014look viable from our perspective and are in line with our call that the EDP deficit targets for 2014 would not be met. The release is not unexpected and, therefore, not negative news, though the deterioration of the debt metrics may create some market nervousness in the days ahead. Nevertheless, we stick to our YE14 3.5% yield call.

RO T-bonds: Romania started the week on a positive note as the debt management agency raised the planned amount of RON 300 mn in T-bonds maturing June 2019 and the average yield slid to 3.09% (down from 3.54% in mid-September). Last Friday, S&P reaffirmed Romania’s ratings at the lowest investment grade which may have renewed investor interest in local bonds (demand for yesterday’s issue was 2.7 times higher than the allocation). Although secondary-market yields hovered near record lows in recent weeks, we continue to see them going higher in 4Q14 and early 2015 due to the increase in volatility on global markets, unrelenting geopolitical tensions and, last but not least, potential uncertainties related to the upcoming presidential elections. We see the 5-year ROMGB yields at 3.95% in December 2014.

Traders’ Comments

CEE Fixed Income: Yesterday’s trading session started off well enough and we even saw opportunistic buyers of Zagrebacki Holding, the Croatian municipal services operator, in spite of the detention of Zagrebs mayor on corruption charges, but it didn’t last long and the buying dissipated in the afternoon. We saw a typical risk-off pattern with CEE FX reversing gains, weak equities, Bunds outperforming as the yield curve bull flattens, Eurozone peripheral spreads widening amid curve steepening and a drop in the oil price. No surprsie then that the rally in CEE fixed income has subsided and with no economic data of importance due out in CEE today, our markets will be guided by global investor sentiment. Overnight trading in Asia doesn’t bode well for today’s trading sesion either. Chinese GDP grew at the slowest rate since 1Q09 with annual growth now heading for the lowest growth rate since 1990.