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2019/01/15 / Erste Group Research

1Q19 CEE bond market report

Government bond yields should drift higher in 2019. Only Czech National Bank is to increase rates this year. We expect sovereign rating upgrades in several CEE countries

Global equity and bond markets were shaken in the last few weeks of 2018 and
at the start of this year. One of the major fears is of a strong global economic
slowdown. Although it is difficult to tell how much global markets might have
overreacted to the negative news flow on worries about an intensified trade war
between the US and China, CEE followed suit, with 10Y LCY yields falling
about 40bp on average since the beginning of November. This happened
alongside the substantially changed market expectations for the Fed Funds
rate, for which markets started pricing in monetary easing on average for this
year-end, while in mid-December, the question for the markets was just about
the extent of the tightening by the year-end.

For 2019, we expect 10Y yields to climb about 50bp higher in CEE on average.
The highest increase of yields (+80bp) is likely to be experienced in Romania,
where the government is struggling to fix the negative fiscal development and
recently proposed measures could actually have an adverse effect on domestic
demand for long-term bonds. Czech and Slovak bonds should mirror the
development of German Bunds, while 10Y yields in countries like Poland and
Hungary, where bond yields have already been at decent levels, should
increase by just 40bp. Among CEE currencies, we expect only the Czech
koruna to see a significantly positive performance (4% against the euro) in

Apart from Romania, all CEE countries should keep their deficits safely below
3% of GDP in 2019. Their public debt to GDP ratios will continue to fall in 2019
to 47.8%, from the 48.9% estimated for the end of 2018. In our recently
published quarterly report ‘What’s up in CEE’, we made a call for sovereign
rating upgrades for several CEE countries. In our view, there is a strong
likelihood that Croatia will regain an investment grade rating in 2019. We
expect a rating upgrade for Serbia by all rating agencies in 2019. S&P and
Fitch currently hold Serbia two notches below investment grade (BB), while
Moody's holds its rating three notches below (Ba3). There might be an upgrade
of Slovenia’s sovereign rating as well, especially if the privatization of stateowned
banks is successfully completed in 2019.

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General information

AuthorErste Group Research
Product nameCEE Economies Special Report
Topic in focusFX, Macro/ Fixed income
Economy in focusCroatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia
Currency in focusCroatian Kuna, Czech Koruna, Euro, Hungarian Forint, Polish Zloty, Romanian Leu, Serbian dinar
Sector in focus-


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