CEE bond issuance becoming more focused on domestic markets

Share of foreign ownership in CEE government debt has been in decline or flat, with exception of Czech Republic

Has there been any shift in the composition of government debt and its holders in recent quarters?’

Croatia: Croatia has been holding a rather steady position when it comes to the government debt profile, where the ownership structure points to a few major players - foreign investors and banks, with both maintaining their broadly stable shares at approx. 35-40% and 20%, respectively. Also important to mention are pension funds, which hold a solid portion of the LT debt, while banks are more concentrated on ST papers. However, last year's political turmoil resulted in a focus on switching more towards local market issuances rather than external ones. However, already in early 2017, we saw the MoF again testing the international waters, amid improving fundamentals, with the current maturity outlook for LT papers suggesting a 75-25% ratio in favor of FX.

Czech Republic: We have seen an increase in the share of government debt-holders. The share of non-residents among holders of Czech bonds has increased from 20% at the beginning of 2016 to more than 40% in 1Q17. As the exit from the FX cap did not bring any significant appreciation, non-residents are waiting for the next development, in our view, and are not selling their bonds. For this reason, we expect that the share of non-residents will remain high this year. The MoF has mainly been issuing T-bills and bonds with shorter maturities, due to the low yields, and we expect that policy to prevail throughout 2017.

Hungary: The share of FX debt in public debt has been in a declining trend. The FCY-to-total debt ratio dropped to 25% by end-2016. This ratio may decline further by end-2017, as it cannot be excluded that the officially planned EUR 1bn worth of FX issuance may not take place, since the MNB does not support FX issuance. As for forint-denominated debt, the share of the local banking sector increased to almost 40%, thanks to the MNB’s measures, including the Self-Financing Program. This raises the question of how banks’ appetite for newly issued local debt may develop over time. Households currently hold 23% of LCY stock, while the share of foreign investors in forint financing declined below 20%. The above changes of the financing structure are in line with the government’s intentions - to mitigate the country’s dependence on foreign financing, focus on households and keep the FCY-to-total debt ratio in a declining trend.

Poland: The steady decrease of foreign-issued debt has been observed since 2014, which reflects the debt management strategy aimed at reducing foreign currency debt to less than 30%. In January 2017, more than half of government debt (52.7%) was held by foreign investors. There has been a slight decrease in comparison to December 2016 (by 0.7pp). The remaining part of the debt was held by domestic banks and non-banks, around 27% and 19%, respectively. There is a visible downward trend in the share of domestic debt held by foreign investors (from 40.3% in February 2014 to around 31.4% in January 2017), as the S&P rating downgrade in January 2016 and rising expectations of a rate increase by the FED in autumn 2016 contributed to some extra sell-offs. On the other hand, the domestic banking sector has been increasing its share in Polish government securities (from around 27.1% in February 2014 to 39.2% in January 2017), partially incentivized by the exemption of government securities from the balance sheet tax.

Romania: Romania’s public debt (EU methodology) has fallen gradually over the past two years, reaching 37.7% of GDP in December 2016, from 39.4% of GDP in December 2014. This is a positive development, especially in the context of the ambitious fiscal easing at present, since it creates additional space for an increase in public debt at a later stage. Its composition by currencies has not varied significantly over the past two years; in December 2016: 48% RON, 42% EUR, 9% USD and 1% other currencies. The maturity structure has also remained broadly unchanged, with medium- and long-term debt accounting for around 94% of total debt in 2014-16. Non-residents' holdings of RON-denominated government bonds fluctuated within a tight interval of 17-19% during the past two years and stood at 17.6% in January 2017.

Serbia: Compared to last year, we have not seen any major changes in the currency structure of Serbian public debt. USD-denominated debt slightly increased, but mostly due to the stronger dollar, while the RSD- and EUR-denominated part stayed relatively stable. However, there were some changes worth mentioning. As a result of the active debt management strategy, the share of longer-dated papers increased (from below 20% in March 2016 to around 24%), which also led to an increase in the average time to maturity of securities by approx. 4-5 months. Although there is no publicly available data on the share of foreign bond-holders, there were statements from the Public Debt Administration that the share of foreign investors was reduced recently and that they currently hold around 27% of total debt.

Slovakia: Domestic bonds account for 82.3% of the outstanding amount, whereas Eurobond and foreign issues make up just 11.7% and 6%, respectively. The quantitative easing of the ECB has affected the Slovak government bond market to a significant extent - decreasing yields and changing the holdings’ structure. Banks accounted for 43% of Slovak government bond holdings at the end of 1Q17, slightly less than at the end of 2016 (44.3%), but much higher than before QE started (4Q14: 32.4%). On the other hand, holdings of non-residents increased from 40.7% at the end of 2016 to 42.1% in 1Q17 (before QE, in 4Q14: 49.9%). With no major expected changes in the ECB’s policy this year, the ownership structure is likely to mark only small changes.

Slovenia: We have not seen any major changes in the composition or holders of government debt in recent quarters. When it comes to the latter, the dominant role is still played by foreign investors, with their holding remaining steady in excess of 2/3 of the total ownership structure, while banks remain second with a share slightly below 20% of total debt (though we see room for stronger exposure on their side, given the slow credit activity and solid liquidity). As far as the structure goes, the majority of the papers remain concentrated in bonds, with only a small portion going towards the T-bill side, i.e. pointing to no recent changes on that side either. However, Slovenia has been active with restructuring its debt profile by switching shorter maturities in USD bonds towards longer EUR tenors, with this action resulting in an increase of the average duration.