EMEA Strategy Bi-weekly

The return of some degree of volatility on EMBIG spreads (10bp wider this week and 46bp wider in the last two weeks) was not as dramatic as the one observed in equities, but we believe that will be enough to raise key questions regarding the stability of currencies such as RUB, UAH and the usual high-betas such as TRY and ZAR, and of course cause some degree of contagion among high-yielding interest rate instruments in the EM space. In the FT this week, we have more details on the Chinese iron ore deal with the Australian miner Fortescue, on which prices have been cut by 35%.
Of course, it is a longer-term deal with interesting financing facilities provided by the Chinese as well, but the mark down in iron ore prices might well destabilise the sentiment of recovery in other points of the value chain, more precisely steel makers (the main catalyst of growth in the Ukrainian economy and a key sector in the Russian economy). That coupled with the clear intention of NBU and CBR to keep easing might well bring more noise to the front end of the NDF curves in Russia and Ukraine. Still on the commodities front, we are still assessing our aggressive overweight on Russian spreads, following the downward revision by our Commodity Research group on year-end oil prices (new forecast at $50/bbl). If this does materialise it will exert significant pressure on RUB risk premium and Russian spreads down the road. In the meantime, the 200bp overweight in Russian spreads stays in place. One of the articles in this publication shows that taking the dynamics in RUB-denominated corporate debt most of the default wave is believed to be waning down (RUB 110bn worth of defaulted RUB debt this year), what might well act as a catalyst for better sentiment on the domestic corporate lending sector in Russia.

Romania sent out a NFP to potential banks last week, preparing the ground to another Eurobond issuance. We believe the Romanian Treasury will continue to favour EUR-denominated issues, and the size of the deal is expected to be around ?500m-?700m. At the macro level, Romania CPI continues on a downward trend (latest CPI measure at 5.1% year on year versus 5.9% in June) and the contraction in real GDP also continued (8.8% in Q2, versus 6.2% in Q1). Further deterioration of the Romanian economy is strongly tied to the massive disruption in credit growth.
Credit to households collapsed from double-digit growth rates to contraction levels (3% down on June this year, as measured by deposits and credits by financial institutions to households). The fact that financial institutions in Romania drastically decelerated their lending programs among the riskier segments (consumer lending and SMEs, for example) is already well known by the investment community but the extension of the credit disruption is still a major unknown. Government measures on the fiscal front, mainly triggered by a ?20bn financial, is prompting a series of measures geared towards the shrinking of the central government machine.