CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HU Fiscal: The 2015 budget draft was submitted to Parliament yesterday. The government calculates with 2.5% GDP growth, 1.8% CPI, a 2.4% fiscal deficit and 75.4% public debt in 2015. The CPI forecast has been decreased significantly from the 2.5% estimated earlier. This is also way lower than our 3% forecast for inflation and also the central bank’s 2.5% expectation. Several new tax hikes are planned for next year: the controversial internet levy, an additional tax on alcoholic beverages, an extended electronic road toll, a levy on mutual funds, increased tax on cafeteria and higher fees on food regulation. Furthermore, the government calculates with an average EUR/HUF rate of 310 in 2015, which is higher than this year. This, together with the new taxes, the higher base and the expected food price increase, may increase the CPI to 3% on average. We thus keep our forecast intact. The government also decided to increase military spending via increased construction and personnel costs, but it is planning to spend less on education and healthcare. All in all, total spending to GDP may decrease to 49.6% from 50.9% based on our calculations. The draft budget does not have any effect on our market forecasts.

HR Budget: The government presented a fairly unambitious 2014 budget revision yesterday. The deficit target was revised upwards by 0.4 pp to 5.0% of GDP (GFS2001 methodology) translating into 5.8% of GDP according to ESA2010 and confirming a strong deviation from the EDP target of around 4.5% of GDP. The revision mainly focusses on the revenue side, accounting for worse than anticipated economic developments, but is coupled with more sustainable cuts on main expenditure items. The financing account confirms recent media speculation that the MoF would push for local bond issuance of around HRK 3 bn. Ongoing fiscal risks back our expectation that we may see HRK yields trending up later in 2015, while supply pressurse may put some transitory upward pressure on yields in the coming weeks.

Traders’ Comments

CEE Fixed Income: As was widely expected, major equity markets in Europe began the trading session on the backfoot as the DAX dropped to 8,900 and we witnessed a widening of yield spreads between the Eurozone core and the periphery but the mood changed around midday and the surprise expansion of QE in Japan overnight has turned that all firmly on its head. For example, the price on the 10y Spanish benchmark bond fell from 105.63% yesterday morning to 104.92% around midday before turning back up to 105.3% toward the end of the day but has gapped higher at the start of today’s trading session to 106.11%. Price developments were not dissimilar in the POLGBs or HGBs and both the PLN and the HUF also strengthened vs EUR around about the same time. The bund is falling like a stone at the open in spite of weaker than expected German CPI figures yesterday and the EUR is under downward pressure. Maybe markets see the BoJ action as a precursor of QE in the Eurozone. In any case, the apparent agreement between Russia and Ukraine to restoring gas supplies is a positive for CEE and the price action following the BoJ stimuls will also give the higher yielding CEE local markets like POLGBs and HGBS a boost today, whilst alleviating some of the selling pressure off CROATIs and ROMGBs amid speculations of new supply in Croatia and Sunday’s Presidential elections in Romania.