CEE Macroeconomic and Fixed Income Research

Analysts’ view

HU Rates: After last year’s robust GDP growth figure (expected to have been roughly 3.4%), MNB Governor Matolcsy sees this year’s growth within a 3-4% y/y band. (The official MNB growth forecast is at 2.3% y/y for 2015). To enhance growth, Matolcsy has been looking at the Funding for Growth Scheme for expansion with the range of eligible corporations under the scheme to be widened. In his view, large enterprises should also be allowed to participate in the program. In our opinion, allowing large enterprises to participate in the FGS is unlikely to boost GDP growth figures significantly.
According to Matolcsy’s statement, an official announcement to extend the FGS may come soon. However, as the devil lies in the detail, we will not change our forecasts yet. At today’s meeting, the MNB is expected to keep the base rate unchanged at 2.1%, despite negative inflation and the ECB’s QE. Although risks are tilted to the downside, we keep our forecast for the base rate unchanged until we see some indications in the MNB’s official communication that they also see room to further reduce the base rate. Our EURHUF forecast is at 316.5 for end-1H15.

RO Bonds: The ECB’s announcement of a huge bond-buying program and the high likelihood that the Romanian central bank will continue with its monetary easing cycle in early February have spurred further investor demand for local government debt , especially for longer-maturity bonds. With the average accepted yield standing at 2.7% (down 104 bps compared to the previous tender held in November 2014), the MinFin raised more than planned at yesterday’s T-bond issue maturing April 2023 (RON 567 m vs. RON 400 m). We see the 5-year ROMGB yield at 2.3% in March 2015, while acknowledging that yields still have room to slip even lower given the prospective capital inflows into the local fixed income market and the very low-inflation environment.

PL Macro: Retail sales, unemployment data and, most importantly, last year’s GDP growth will complete the data releases for 2014. Our expectations point to positive growth in retail sales of 2.5% y/y in December as households kept their level of spending high. The labour market situation keeps improving and seasonally adjusted unemployment will be much lower than it was a year ago. Taking into account the recent releases that beat market expectations we see space for GDP growth to come in above our forecast of 3.3% in 2014. (Only the FY2014 statistics will be released today for GDP, the quarterly 4Q14 figures will be disclosed in February). If this transpires, it should be supportive of the zloty and we expect a continuation of the appreciating trend toward 4.17 vs EUR until mid-2015.

Traders’ Comments:

CEE Fixed Income: Someone’s got it wrong. Major global markets reacted calmly to the Syriza victory in Greece but Greek bonds sold off. We will have to wait and see how this plays out but Greek banks reacted with big losses in equity markets. CEE fixed income had a relatively calm day apart maybe from Romanian local currency government debt which is on fire (the 10y re-tap priced 5 – 6 bps below market yield expectations) and Croatian Eurobonds which were trading on the bid side, selling off 5 – 10 bps in yield across the curve ahead of the newly announced international bond issue expected next month. CEE FX markets consolidated a little and will also have to grapple with Russia’s downgrade to junk by S&P this morning. The oil price continues to slide and deflation fears are stoking expectations of further monetary easing in CEE as central banks in the region attempt to stem the implicit tightening from currency appreciation following QE. NBP dove, Andrzej Stanislaw Bratkowski, said he expects 2015 GDP growth to be below government forecasts of 3.4% along with deflation at least through 1H15, convincing him that there is “significant” room for rate cuts. Yields on HGBs seem to indicate that a rate cut in Hungary is also a foregone conclusion. Those expectations could obviously be dashed very quickly if developments in Greece negatively impact risk premiums.