Three countries in Central and Eastern Europe have shaken off their “emerging market” label, at least when it comes to investor appetite for their newly-issued debt, Manfred Burdis, head of debt capital markets origination at CEE-focused Austrian bank Erste said in an interview.
The countries are Poland – the biggest in the region and the only one to post economic growth during the 2009 recession in CEE – the Czech Republic and Slovakia.
“They’re not considered emerging markets anymore,” Burdis told Emerging Markets. “They’re now starting to be compared with some of the ‘core’ eurozone countries.”
Fears that the eurozone crisis will intensify have escalated, with reputed economists warning recently that the single currency area was “sleepwalking towards disaster.”
Those fears have polarized yields on sovereign debt in the area, with countries considered safe – such as Germany or the Netherlands – offering negative yields while periphery countries’ borrowing costs have risen to painful, and in some cases unsustainable, levels.
“In the eurozone, there are countries with negative interest rates and at the other end of the spectrum the no-touch periphery territory,” Burdis said.
“It seems that our countries fall exactly in between. You combine that with the fundamentals of the countries. All of the countries with the exception of Hungary have debt levels that are lower than eurozone countries, and from that perspective it’s looking fundamentally very attractive.”
“The most recent example has been Poland. If you look at the transaction that we did for them just recently in June, that was a 1.5 billion [euros] transaction and that was issued at that time at 195 over swaps, which at the time was considered already tight. It is now trading at 1.42 over swaps,” he said.
Poland, the Czech Republic and Slovakia are all affected by the eurozone debt crisisas their economies export to the area but at the same time their fundamentals – such as debt to gross domestic product ratios and fiscal positions – are much betterthan those of countries in the single currency area, analysts said.
FRONT-LOADED ON FUNDING
Taking advantage of the favorable climate, countries in the region have “front-loaded” on their funding and are now nearly fully funded for the year, according to Burdis.
Poland had 40 billion euros to fund this year, for which the government taps both international and domestic markets. The country did three benchmark transactions, in euros, Swiss franc and yen, which have covered all their foreign exchange issuance needs for the year, he said. Overall, 80 percent of Poland’s borrowing needs for this year are covered.
“The domestic Polish capital markets are probably the most developed in the region,” Burdis said.
The Czech Republic had 10 billion euros to fund this year and this amount is between 75 and 80 percent covered, with most of the money coming from its liquid and strong domestic market. The country only had one Eurobond worth 2 billion euros this year.
“They have the luxury that they could find their entire government funding requirements in the local markets. The banks and the financial sector in the Czech Republic are very cash rich and the central bank in the past has restricted outflows [from the Czech Republic into foreign assets],” Burdis explained.
Slovakia has covered about 90 percent of its funding needs of between 7.5 billion and 8 billion euros for the year, having done two benchmark issues in euros and dollars this year and a transaction in Czech crowns.
“Hungary is the outlier of the region and this is largely politically-driven,” he said.
Hungary, which started negotiations with the International Monetary Fund (IMF) earlier this month, has 8.8 billion euros in funding planned for this year, of which around 4 billion euros were earmarked to be issued on the international markets.
“They haven’t done an international transaction to date but if they conclude the IMF agreement as they wish, the need [for foreign exchange funding] would drop to a fraction of that,” Burdis said.
INVESTOR BASE
Most investors are from continental Europe, particularly for the 10-year, 1.5 billion euro Polish bond issued in June, where 25 percent of buyers were German, 16 percent were French, 14 percent were Polish and 11 percent were Austrian; 7 percent of investors were Asian and 6 percent from Britain.
“What we see is that it’s not the emerging market type of investor, “said Burdis. “The continental Europeans are seeing that they’re not getting adequate returns in their own bonds and are going into such bonds.”
“The same thing is very much true for the recent Czech Republic transaction; it looks very much the same.”
Burdis echoed some analysts who are bullish on CEE, saying the three countries in the region have become “to a certain extent a safe haven of Europe.”
“This is true from a continental investor base’s point of view. If you sit in the eurozone and you choose your bets in the wider region and you’re picking your best bets out of that region, that’s exactly where you go: CEE,” he added.
“If you look at it from completely outside Europe, like Asian investors or US investors, things look somewhat different - then you may pick some of the more Eastern countries, or countries with special situations like Hungary which are more speculative but carry higher yield. But that’s if you are an emerging market investor.”
But despite robust demand for their debt, it is uncertain whether the countries will be issuing any more bonds in the second half, seeing that their funding requirements are covered.
“None of them has a need, so it really boils down to something I could consider opportunistic,” Burdis said. “Since they have no need to come to the market... the opportunity becomes more one of benefitting from a continued trend.”