CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

RS IMF: Serbia has successfully ended talks with the IMF by striking a 3 year long EUR 1 bn precautionary Stand-By Arrangement (the deal is yet to be approved by the IMF Management and Executive Board). The aim of the deal is to help Serbia implement fiscal consolidation and structural reform programs in unfavourable economic conditions after the outburst of floods in May 2014. The Serbian government committed to cut the deficit from around 7% in 2014 to 3% in 2017 by various measures including wage and pension cuts (already effective), public sector employment redundancy programs, restructuring of SOEs, a continuation of the privatization process and an improvement of tax collection efficiency. We see the result of the negotiations as important as the IMF deal can serve as a policy credibility anchor and we expect markets to welcome these announcements, especially the FX markets. We see the EURRSD at 118.5 at the end of this year.

TR Rates: The CBT left interest rates unchanged at the MPC meeting. The CBT believes that the current monetary policy stance is consistent with lowering inflation next year in tandem with the CBT’s projections presented in the Inflation Report. The CBT is not yet at the point where it worries about any downside risks to the official 6.1% CPI estimate for end-2015. The CBT is apparently more cautious than the market was expecting. We maintain our 25 bp rate cut forecast for this year and foresee no change in the policy rate next year. That is a more hawkish scenario than the market is currently pricing in and we see upside risks to the current level of short-term yields. Today is S&P’s prescheduled date for a review of Turkey’s rating. We do not expect the agency to make any changes in its already cautious BB+ rating or its negative outlook. However, the risk is on the positive side and an outlook change to stable could be possible.

RO Bonds: Romania raised the planned amount of RON 500 mn in January 2018 T-bonds. Strong investor demand for the local debt (the bid-to-cover ratio was 2.7) helped push the average yield lower (to 2.39% from 2.57% at the last reopening in late October). In a separate event, the Electoral Bureau published the final results of Sunday’s run-off in the presidential election. According to the release, Klaus Iohannis won about 54.4% of the total votes, while current PM Victor Ponta garnered 45.6%. We expect the 5-year ROMGB yield to rise to 2.9% by December 2015.

PL Rates: The MPC minutes showed that most of the MPC members believed that the slowdown in the economy was only temporary and the October cut was enough to bring the inflation rate close to the target in two years’ time.
Moreover, some of the members argued that lowering the policy rate further could bring real rates close to zero or even negative over the projection horizon, which could destabilize the economy. Some of them favoured keeping the policy rate flat in order to assure room for adjustment if the external environment deteriorates further. The strong 3Q GDP figure favours the arguments for a temporary slowdown, limiting the probability of a further rate reduction below 2%. In a separate report, the growth of industry at 1.6% y/y in October brought no major surprises for the markets which anticipated an expansion of 1.4% y/y. The downward trend of the PMI index in Germany is cooling down expectations of a dynamic recovery of industry (and growth), which, in combination with the mild inflationary pressure (as confirmed yesterday by the negative PPI figure of -1.2%), should keep yields low (we forecast a yield of 2.4% toward the end of 1Q15 on 10y POLGBs).

Traders’ Comments:

CEE Fixed Income: CEE capital markets took their cue from the strength in the Bund rather than the weakness of equities following Eurozone PMI data which fell to the lowest level in 16 months. US CPI was a non-event. Yields were lower across the curve in local currency government bonds, Eurobonds and cash CEE corporates. The notable exception was Serbia in a classic case of “buy the rumour, sell the fact”.