Erste Group: CEE Macro/Fixed Income Daily
September 28, 2012
CZ Rates: The CNB cut rates on Thursday by 25 bps yesterday, making the Czech Republic one of the countries that have rates at or near zero. This was expected by the market as well as us. More importantly, the CNB also discussed what to do next, given that rates are now at 0.25% and orthodox tools of monetary policy are no longer applicable. As expected, The CNB singled out FX interventions as the only tool that’s relevant given the nature and the state of the Czech economy (small, open, in recession) and its banking sector (awash with liquidity). While we don’t think the CNB will intervene unless the economy deteriorates substantially and thus turns decisively antiinflationary (say, GDP -2% next year), the CZK responded by weakening to 25.10 against the EUR. We think there’s space to go all the way down to 25.50 now, given FX-intervention talk of the central bank governor, political uncertainty (the government may not get the budget through parliament) and a potential escalation of the situation in Spain and Greece.
RO Rates: The NBR kept rates unchanged at 5.25%, as expected. Minimum reserve requirements were also left unchanged for both the RON and FX. The pick-up in the annual inflation rate is considered to be of a temporary nature by the NBR. The short-term inflationary outlook has worsened, which calls for a prudent monetary policy stance. Capital flows are affected by foreign investors’ risk aversion in the midst of the Eurozone’s sovereign debt crisis and worsening growth prospects worldwide. In our opinion, this implies that the depreciation pressures on the RON are still present. We forecast an inflation rate above the NBR’s target in the coming quarters and tighter control of liquidity in the market via open market operations. Chances for a rate hike have increased somewhat, but the depressed growth outlook speaks against an aggressive tightening cycle. We foresee 5Y yields at 6.8% and the EURRON at 4.55 in December.
SK Fiscal: The Slovak Ministry of Finance lowered the projected tax income for this and next year, due to worsening macro projections and lower intake of personal income tax in 2012 (also affecting the expected levels for the following years). The Ministry of Finance calculates a shortfall of tax revenues of EUR 233mn in 2013, reducing much of the government's reserve for priorities. The deficit target of 3% of GDP for 2013 should not be endangered but the government would have to adopt further fiscal consolidation measures in order to keep the buffer for its priorities. The deficit for this year might end up slightly higher than the figure that was budgeted, at up to 5% of GDP, compared to the budgeted 4.6%. Along with the possible resurgence of market tensions, we see Slovak government bond yields more likely to increase than decrease in the coming months.
RS Bonds: Serbia decided to utilize the current favourable market sentiment and tapped the Eurobond market raising USD 1bn at a yield of 6.625% in a reopening of last year's 2021 tenor. The initial target was set at USD 750mn but robust investors’ interest (reported at USD 4b) allowed Serbia to go for higher issuance while still boasting a bid-to-cover ratio of 4x but on-going fiscal uncertainty and no IMF back-up forced Serbia to pay ca. 50bp premium vs. recent yield and CDS quotations to get the deal done. This may have been a price worth paying as successful issuance has alleviated budget gap financing risks for 2012. This is supportive for our 116 EUR/RSD forecast for this year. The strong market interest suggests some potential for a drop in yield in the upcoming period if market sentiment remains unchanged.