CEE public debt at very low level; net issuance of government bonds expected to be rather lowGiven the relatively low level of public debt and fiscal deficits in CEE8, the supply of government bonds should remain at reasonable volumes, despite the relatively shorter average maturity of government papers.
The highest gross issuance will be in Hungary, as a big amount of government debt (19% of GDP) matures in 2009. However, given the agreement with the IMF/EU, which should roll over about 5% of maturing debt, the Hungarian government will not need to go on foreign markets to borrow and the net issuance will be negative and done in local currency only. At the end of the day, there will be less outstanding Hungarian government securities on the market compared to 2008. Thus, the local market should be able to absorb the supply of government securities just by rolling over maturing securities. Besides the negative net issuance, the short-term rates heading south should also be supportive of government securities.
Liquidity situation and further monetary easing should increase demand for government bonds
“In general, we expect that the contraction of strong credit growth in CEE8 and the growing market of pension funds (mainly valid for Poland and Slovakia) will increase the demand for government securities of about 1-2% of GDP,” says Juraj Kotian, co-head of CEE Macro & Fixed Income Research at Erste Group.
On top of that, most CEE8 banking sectors have excess liquidity (the highest in Slovakia – almost 20% of GDP). Thus, banks will be in a hurry to place this excess liquidity in government bonds, rather than put it on central bank deposits at low interest rates. There has been solid demand for government securities already in the first month of this year, with auctions heavily oversubscribed. Besides rate cuts, central banks might opt for cutting the minimum reserves requirement in order to ease monetary policy and support credit growth/government bond issuance.
Hungary, Ukraine, Romania and Croatia have already cut (or partially cut) their abnormally high minimum reserves requirements, which had been draining too much liquidity from the market. Experts wait that central banks will continue in “normalization” of their minimum reserves requirements (especially in local currency) in 2009, releasing locked liquidity back to the market. Given the deceleration of credit growth, such high minimum reserves have become obsolete and might only have an adverse effect on these economies, government yields and credit growth through too tight liquidity constraints.
D.C.