CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

CZ Rates: As the inflation rate in the Czech Republic remains low (0.2% y/y in February), the CNB board is expected to leave both the interest rate and FX intervention target (27 EURCZK) unchanged at today's meeting. According to CNB Governor Singer, there is no indication that the inflation rate should start growing faster than the recent CNB prediction (released in February) denotes (0.8% in 2Q2014). As the CNB will not remove the current FX intervention floor (27 EURCZK) earlier than at the beginning of 2015 according to Singer, we expect the first hike to come no sooner than in 2Q15 and for the yield on the 10y benchmark CZGB to subsequently inch up toward our forecasted level of 2.24% by the end of 2Q14.

SK Bonds: Slovakia placed NOK 3.4 bn (EUR 406mn) worth of syndicated bonds yesterday. The bonds are part of an effort by the liquidity agency (ARDAL) to further diversify its investor base – although the share of nonresidents holding Slovak bonds is already now above 50%. The placed bonds had 10- and 12- year maturities and their yields were close to those quoted in the secondary market (after being swapped to EUR). Thus, Slovakia has already managed to place around EUR 3 bn of bonds since the beginning of the year - roughly half of the estimated borrowing needs for 2014. Further, the agency said that it does not plan to execute any more major international bond issues this year and will likely borrow via local auctions. We stick to our forecast for SK 10Y yields increasing to 3.0% by year end.

RO Fiscal: The budget balance shifted to a deficit in the first two months (0.5% of GDP, cash terms), following a marked slowdown in revenues to 4.1% y/y in February, from more than 10% in January. A noticeable deceleration in VAT collection was the main culprit behind the poor revenue performance in February. On the expenditure side, public CAPEX remained depressed in the first two months, falling more than 10% against the year-earlier period, and the same was the case for the projects benefiting from non-reimbursable funding from the European Union (-23% y/y). The cabinet seems to be hell-bent on increasing the excise hike on fuels by 7 eurocents/liter as of April 1, in an attempt to batten down the budget, especially in an election year. We see the budget deficit at 2.8% of GDP in 2014 (ESA) and the 5-year ROMGB yield at 4.8% in December.

Traders’ Comments:

CEE Fixed Income: The IMF rushed a USD 15 bn bailout package through for Ukraine, putting fears from investors of a sovereign default on the backburner. Russian Economy Minister, Alexei Ulyukayev, indicated that outflows could reach USD 100 bn this year, pushing GDP growth prospects down to 0.6% in 2014. This is all important stuff for RBI which announced annual results this morning and provided a positive surprise to markets by beating profit expectations in Ukraine. The bank is obviously exposed to the Russian economy but reiterated guidance for 2014. This has left some market participants scratching their heads. It’s difficult to envisage the sub debt having a good day today especially given the pressure on financials in general emanating from the US overnight where 5 banks failed to pass the Fed’s stress tests. In fact, the Fed has really thrown the cat among the pigeons this week. Obfuscation seems to be the name of the game which in plain English simply means, central banks have lost the plot. It certainly seems that way in our neck of the woods. The Polish Finance Minister said yesterday that he expects GDP growth to exceed 3% this year, whilst central banker Zielinska-Glebocka forecasts growth of 3.8%. That’s quite a difference but even stranger is her statement that NBP guidance for stable key rates could be extended from end-3Q to end 2014. POLGBs thanked her for it and yields drifted lower around 3 bps at the mid to longer end of the yield curve.