CEE Macroeconomic and Fixed Income Research

Analysts’ View

PL Macro: The labor market is expected to deliver more good news on economic activity in Poland today. In the afternoon, nominal wage and employment growth will be released. We expect that wage growth dynamics was around 3.6% y/y in April. Although such a number means lower growth dynamics than a month earlier, positive trends dominate as unemployment is going down and employees’ bargaining power increases. Moreover, the market expects to see employment growing by 1.1% y/y in April, which should confirm the ongoing improvement of labor market conditions. Such development supports our expectations to see robust growth of private consumption in 1Q15 when the GDP breakdown is published. Good economic outlook supports a stronger zloty (the EURPLN should decline to around 4.02 by the end of 2Q15).

RO Bonds: The MinFin sold T-bills maturing in May 2016 worth RON 400mn as planned, at an average yield of 1.39%. Demand from investors was strong at RON 1.25bn. Ambitious monetary easing by the NBR with simultaneous cuts in the key rate and RON MRR (Mandatory Reserve Requirement) could further support demand for short-term debt instruments. On the other hand, medium- and long-term bonds will be shaped mainly by fiscal and external risks. Our forecast for 5Y bond yields remains 2.3% for December this year.

RS Banks: In-line with the targets set in the EUR 1.2bn deal signed with the IMF earlier this year, the Serbian government and World Bank’s IFC agreed on a programme to improve bankruptcy legislation and speed up out of court settlements in order to battle the high level of non-performing loans in the country that hinders credit growth. Economic minister Zeljko Sertic said that the programme is aiming to change current legislation that would allow problematic debts to be settled out of court without launching a bankruptcy procedure. Last week, IMF’s representative Daehaeng Kim said that Serbia needs to tighten up its tax and regulatory framework to solve the situation arising from a very high level of non-performing loans. At the moment, the country is still facing a challenging fiscal situation with the budget deficit forecast at 5.5% of GDP this year. However, the first few months of the year brought rather positive fiscal developments, and in its decision to cut the base rate last week, the NBS also flagged that monetary easing was possible due to improvements on the fiscal front and better international sentiment. We see the policy rate at 6% at the end of this year (vs. our previous assumption of 6.5%) and see the EURRSD hovering at 122.5 at the end of this year.

Traders’ comments:

CEE Fixed Income: Speculation that Greek banks could run out of the collateral they need to access emergency ECB funding within weeks drove the yield on 2y GGBs above 25% in yesterday’s trading session which subsequently pressured the Eurozone periphery, especially Italy, just as the “safe-haven” trade (buying Bunds) now appears to be a thing of the past (yields on Bunds also rose). As Greece stumbles toward default, the question everyone is asking is whether the fall-out can be contained. Yield moves in CEE are limited but prices are moving on low turnover as investor’s baton down the hatches. In the currency markets, both the HUF and the PLN came under pressure mirroring moves in yields on USTs. Concerns from Greece coupled with downward price moves in Bunds and USTs indicate that fixed income investors are indeed reallocating but capital flows are moving out of the asset class in general. Moreover, the weakness in the HUF and PLN signal a shift away from CEE fixed income by international bond investors.