CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

SI Politics: The political scene took a significant change following the parliamentary elections yesterday. Newcomers performed well, with Miro Cerar’s Party (SMC) expectedly being victorious, and the record high support (34.6%; 36MPs) further adds to the strong impression. The Slovenian Democratic Party (SDS) expectedly took the runner-up position, though the result failed to outperform the polls (20.6%; 21MPs; 5MPs less). The stage is now set for coalition talks, and given the strong position and potential coalition partners, the SMC is in a solid position to ensure a majority in the 90-seat parliament. Upcoming weeks will reveal more as potential combinations are numerous; in the meantime, while we are not excluding some market volatility, we do not envisage a major sea change for yields but markets will be waiting for more details on the SMC’s policy agenda.

SR Rating & Politcs: In line with our expectations, Fitch affirmed Serbia's credit rating at B+, with a stable outlook. Even though Fitch recognizes the deterioration in economic activity and rising fiscal pressures after the floods, the agency decided to give the government the benefit of the doubt as they expect that several structural reforms (affecting the labour law, tax administration, land registry, bankruptcies, privatization and pensions) will be passed in the coming months. These laws are important preconditions for the announced consolidation and SOE restructuring program. The agency also sees the IMF deal as an important policy anchor that will give credibility to the consolidation plan and shore up investor confidence. The track record of implementation of structural reforms and fiscal consolidation programs remains a clear rating shaping factor ahead. On the topic of implementation risks, we would point to Finance Minister Krstic‘s resignation this weekend, triggered by the deviation of opinion between him and PM Vucic regarding the most appropriate consolidation path. Fiscal risks, thus, remain further amplified, suggesting that policy makers will still have to work hard to stabilize the rating outlook in the long run. We assess Fitch’s decision as market supportive, though in the near term the resignation of Krstic may bring some volatility to the market and put some pressure on yields.

TR Macro: The 12-month rolling C/A deficit narrowed to USD 52.7 bn (6.6% of GDP) in May from the previous month’s USD 56.9 bn (7.1% of GDP). This was a slightly faster improvement than the market had anticipated. The sharp increase in net gold exports, the recovery in Europe and weak domestic demand all contributed to the contraction in the external deficit. We maintain our USD 50 bn C/A deficit forecast for the end of the year. All eyes will be on the Treasury’s auctions today ahead of the MPC meeting on Thursday. Strong foreign interest could encourage the CBT to cut rates. We expect a 50 bp cut in the one-week repo rate from the meeting, which is also the consensus.

Traders’ Comments:

CEE Fixed Income: HGB yields rose on Friday in spite of record low inflation and CPI will also be on investors agenda this week in Poland. Shorter dated POLGBs look attractive compared to Hungarian debt with a 25 bp pick-up. The German ZEW may dampen spirits after Sunday’s world cup final as growth stutters in the Eurozone’s strongest economy. US industrial production and retail sales will also be watched closely with the divergent growth paths between the US and Europe expected to continue. At some point, this divergence is likely to result in a stronger USD and the CROATI 6.25% 2017 in USD looks like good value at 220 bps over US-Treasuries. We are also bullish on the long end of the RSD curve following the NBS decision to keep rates on hold in spite of inflation undershooting the central bank’s target. At 11% yield in the 7y segment of the curve, it’s hard to ignore as economic growth dynamics deteriorate and an inversion of the curve increases in likelihood.