CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HU Fiscal: According to leaked information, the government expects 2.5% GDP growth in the 2015 budget draft which is somewhat higher than the CB forecast (2.4%) and our expectation (2.3%). The government also anticipates 2.5% inflation for next year, in line with the national bank expectation. According to newswires, the government is going to achieve the military expenditure obligationlaid out by NATO which means HUF 200 bn of extra budget spending. Thanks to the conservative budget plan they will not increase pensions significantly in real terms. The Economic Minister also announced important changes in the tax system that affects the telecommunication sector (new 'internet tax') and the financial sector as well (tax on mutual fund fees). Families will receive further tax breaks gradually by 2018. The minister also said that the government aims to give incentives by reducing the banking tax to boost lending but not in 2015. There is nothing in these plans that would affect either our macroeconomic or our market forecasts.

RO Bonds: Romania yesterday raised EUR 1.5bn in a 10-year Eurobond issue, pre-financing some of its funding needs for next year. The issue that carries a 2.875% coupon was priced at 185 bps over mid-swaps. Total offers submitted by investors amounted to 4 billion euros. The issue is aimed at prefinancing 2015 needs withdebt repayment of EUR 4bn due in the first quarter. The MinFin plans to sell up to EUR 3 bn in foreign debt issues overall in 2015, but the amount could be higher if the market remains favourable, an official from MinFin was quoted as saying. Local yields should drift higher towards the end of this year accorinding ot our forecasts as we still see risks stemming from populist measures that will only be digested by investors after the presidential elections and growing tensions on the Eastern border as the cold season sets in.

Traders’ Comments

CEE Fixed Income: Risk-off flipped back to risk-on. Media reports that the ECB is planning to buy corporate bonds as soon as December may be far fetched but what may have been deemed impossible a few years ago can no longer be brushed off so lightly in times like these any more. However, the flipflopping we are seeing now was always going to be the most likely outcome after the severe volatility last week given that we don’t have a lot to go on in terms of new data until this afternoon’s release of US CPI. The results of the ECBs Comprehensive Assessment are also looming over the market but we have seen some bargain hunters enter the market in Austrian financials ahead of Sunday’s announcement. Especially, the RBIAV 6.625% 21 subordinated bond is attracting attention. In CEE cash corporates, turnover is light and prices are mostly unchanged but inquiries were predominantly for offers. Romania utilised this window of opportunity particularly effectively, raising EUR 1.5 bn in international markets which obviously gave a fillip to ROMGBs as well. Elsewhere in local currency government bond markets, yields on HGBs continued their journey south after the Debt Management Agency sold fewer T-bills than planned for the first time in 11 months and then said it would lower issuance by HUF 500 bn to cut debt in a re-run of events from last year when Hungary last came under the scrutiny of the EU with regard to its budget deficit. Serbia expects to sign a precautionary program with the International Monetary Fund by year-end and adopt the 2015 budget on time, Premier Aleksandar Vucic told the press. Yields promptly fell 10 bps in the USD Eurobonds.