CEE Macroeconomic and Fixed Income Research

Analysts’ view

HR Banks: Following the SNB decision to abandon the peg versus EUR and the subsequent surge in the debt repayment burden for CHF denominated mortgages in Croatia, the Government decided to step in to offset the effect, adopting the amendment to the Consumer Credit Act which freezes the CHF/HRK rate at 6.39 (i.e. fixes the EUR/CHF exchange rate at 1.20) for a period of one year. In the meantime, a long-term solution aiming to convert the CHF loan book to either HRK or EUR is expected to be presented. Total exposure within the private sector (Nov-14 data) amounts to CHF 3.4 bn out of which CHF 3.2 bn falls within the housing loans portfolio. The effect of the sudden change in the exchange rate caused an approximate HRK 4.5 bn upsurge in debt exposure measured in the local currency (ca. 1.4% of GDP).
The cost of the exchange rate freeze will have to be borne by the credit institutions but no details on the eventual conversion rate or a potential cost split are yet known. Uncertainty will remain elevated given that populist requests from the electorate ahead of the parliamentary elections are likely to gain traction. Thus far, domestic markets have remained calm as investors focus on the ECB meeting. Therefore, we continue to see room for some additional yield compression throughout 2015.

PL Macro: Employment and nominal wage growth beat market expectations (1.1% y/y and 3.7% y/y in December). Will industrial output be a positive surprise as well? Our estimate of 4.2% y/y is a bit more pessimistic than the market’s expectations and any upside surprise will be an argument against rate cuts. The current situation on the FX market is a more important issue for the central bank, however. Nevertheless, should the pressure on the Zloty subside, market expectations for further easing will keep yields low. This is our base case scenario and we forecast10Y yields of 2.15% at the end of 1Q15.

TR Rates: The CBT cut the policy rate by 50 bps to 7.75%, a more dovish move than the consensus and our view of no change. However, the CBT left the corridor unchanged at 7.5% and 11.25%. The lack of any change in the upper boundary is positive since it indicates that the CBT will have the capacity to defend the currency by implementing tight liquidity management should the need arise. The CBT left the door open for further rate cuts but made it conditional on the pace of improvement in the inflation outlook. We revise our rate cut expectation for this year to 100 bps (from 50 bps) and foresee consecutive 25 bp rate cuts at the February and March meetings.
Meanwhile, some senior government officials called for more rate cuts. This pressure could make it harder for the CBT to maintain its vigilant approach regarding the inflation outlook and unwarranted cuts could destabilize the TRY especially if and when the Fed starts hiking.

Traders’ Comments:

CEE Fixed Income: CEE fixed income was in consolidation mode yesterday and it’s getting hard not to believe that the ECB announcement on Thursday will be a disappointment but this has not deterred European investors as equities surge and primary issuance in fixed income is heavily oversubscribed. Polish bank bonds which have suffered in the wake of the surge of the CHF were strongly bid yesterday and even RBI got some respite, especially the senior bonds, in spite of an escalation of the fighting in Ukraine. There was some good news from Serbia after the Finance Minister, Dusan Vujovic, said he expects an IMF deal to be approved by February 23rd. We expect a spate of positive comments from high ranking government officials and central bankers who are mingling with investors at the Euromoney conference in Vienna this week. Stefan Nanu, head of the Romanian treasury and public debt department, who is also attending the conference remarked that Romania will likely issue a Euro denominated 12 -15 year maturity Eurobond before the end of 1H15 as a consequence of expectations for QE from the ECB.