CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HU FX: The banking sector converted EUR 7.83 bn (HUF 2,400 bn) FX loans yesterday with the facilities provided by the central bank. The conversion price was last Friday’s market rate (7 Nov: EUR/HUF at 308.97, CHF/HUF at 256.6, JPY/HUF at 2.163). The central bank provided the total amount in two tranches; EUR 1.627 bn via the conditional tool and the other EUR 6.207 bn via the so-called unconditional tool. The first one was a direct supply of FX provided to the banks, where they committed themselves to decrease their short term liabilities by 50% of the required amount. This decreases the FX reserves of the central bank in the short run. The larger unconditional amount however only decreases the central bank’s FX reserve gradually over 3 years and will likely be offset by the natural increase of the reserves (EU funds, C/A surplus). Via these measures, the vast majority of FX mortgage loans has now effectively been converted to HUF. Therefore, we consider the step as excellent news also for macroeconomic stability (decreasing external debt) and for the banking sector as well (conversion at market rate). The forint reacted positively but with heavy volatility on Monday. We keep our forecasts (EUR/HUF at 305 in 2014 and 310 in 2015 eoy) unchanged as the step meets our earlier assumptions.

CZ Macro: CPI in the Czech Republic remained flat in October (0.7% y/y), due largely to the recent rather slow accumulation of domestic inflationary pressures (core CPI close to 1% during the last three months), in spite of the continuing solid expansion of the Czech economy. Moreover, also with respect to the risk of a further increase in disinflationary pressure related to the possibility of a continuing slowdown in economic growth in the Euro Area, it seems fairly probable that the CPI will remain below the 2% CNB inflation target at least until the end of 2015. Therefore, the CNB will refrain from starting its FX intervention exit at least until the beginning of 2016, in our view. Irrespective of today's CPI release, the EURCZK depreciated from 27.70 to 27.60, i.e. closer to our forecast of 27.50 at the end of 4Q14.

RO T-bills: The MinFin tapped the domestic market with a one-year T-bill issue worth RON 1 bn, as planned. Yields fell to 1.63%, down from 1.90% at the previous tender held in late October, as the market is awash with liquidity. Rising expectations that the central bank will continue the easing cycle early next year, as headline inflation may continue to run low, have renewed interest in local securities, especially for short-term maturities. We see the 5-year ROMGB yield at 2.9% in March 2015.

TR Macro: Industrial production breached our estimate and advanced by a sharp 4.1% y/y in September partly thanks to the higher number of working days and partly due to the underlying strength in the leading indicators.
Accompanied with signs of a faster economy in 4Q, the data alleviates the downside risks to our 3.4% GDP forecast. The data has not altered our 25 bp rate cut expectation for this year from the CBT and some currency strengthening may encourage the CBT to implement a cut either in November or December.

Traders’ Comments

CEE Fixed Income: With few headlines of note, CEE fixed income yields drifted lower and demand for CEE corporates remained solid. OMV (A3/nr/A-) successfully issued a 4-year bond yesterday, raising €750m at midswaps +28 bps with an order book north of EUR 2.5 bn. Italian banks with a strong presence in CEE (UniCredit & Intesa Sanpaolo) will release their third-quarter results today, following decent results from Poland’s 2nd-largest bank, Pekao, which is a subsidiary of UniCredit. Financials may catch a bit of a bid following the FX conversion in Hungary with the decision not to impose greater losses on banks seen as good news for the sector but there are still some concerns ahead of Thursday’s “fair banking” bill. mBank SA, Poland's 4th largest universal banking group in terms of assets, rated BBB+ by S&P and A by Fitch, is expected to issue a senior unsecured EUR denominated transaction issued by mFinance France SA and guaranteed by mBank SA in the near future.