No big pressure on CEE to issue bonds in 2H20
CEE governments managed to issue a substantial amount of debt in 2Q20 without problems to cover the increased financing needs of the coronavirus crisis. Some countries have built up safety reserves and may even think about pre-financing in 2H20, although this is not true for all of them.
As the COVID-19 crisis hit the region, it was inevitable to see soaring financing needs. However, we also saw that CEE countries managed to narrow the financing gap quite successfully. Our data shows that countries issued 3-11% of GDP in the second quarter alone, nearing 7% of GDP on average.
Demand was propped up by central bank action too. Besides substantial interest rate cuts in Czechia, Poland, Serbia, and to a lesser extent in Romania, some central banks employed unconventional tools. The Polish, Croatian, Romanian and Hungarian central banks all conducted bond purchases to an extent of 0.3-4.9% of GDP.
The huge financing gap made it desirable to try to diversify towards the Eurobond market for this. While at the beginning of 2Q20, tapping foreign markets seemed a distant possibility, regional countries managed to issue notable amounts of FX debt in the last few months.
The enormous financing gap made debt managers reconsider their strategies. Poland is a striking example, as it issued a relatively low amount of government paper, but this is complemented by roughly twice as much in bond emissions by development bank BGK and development fund PFR. Another example of a strategy change is Hungary, which previously avoided issuing FX debt almost entirely. This has now changed, with the issue of EUR 3.5bn this year. The goal of high retail ownership has not changed, however.
LCY yields have dropped substantially in 2Q20, which is unlikely to continue in most countries. Romania would be a candidate for yield declines, but a prerequisite for that would be a permanent fix of the budget. On the Eurobond market, yields have still not decreased back to the levels seen at the beginning of the year. For this to happen, however, continued positive international investor sentiment would be key.