Financing needs soar on coronavirus but central banks help demand
The supply of new government securities will soar, but demand is also picking up as central banks put their arsenals in place. Countries in CEE differ. Eurozone members in the region enjoy ECB purchases, while Czechia and Poland also sold bonds very quickly without problems.
The coronavirus pandemic has hit CEE hard. Governments in most countries have come out with substantial stimulus packages, but the deterioration of tax revenues will also hit budgets. An inevitable consequence is the substantial increase of gross financing needs. We estimate that net issuance needs will increase by between roughly 3% and 9% of GDP in CEE compared to the levels assumed at the beginning of the year. This corresponds to more than EUR 65bn, which is around 5.1% of the region’s GDP.
As market volumes have dried up, it is unlikely that we will see any CEE countries tapping international markets very soon. Strong prefinancing before the outbreak of the COVID-19 pandemic, and ongoing deals with IFIs in some cases, help regional countries to refrain from foreign markets. Prompt reaction from the EC eased access to unused funds as well. EU Member States do not need to reimburse unspent pre-financing, so countries will be allowed to hold onto EUR 8bn of this money. Countries can also take up to EUR 28bn of structural funds from their 2014-2020 national envelopes not yet allocated to projects. The total available amount within the Coronavirus Response Investment Initiative would then range from 0.5% of GDP in Czechia, 1.4% in Poland and Romania, more than 2% in Croatia and Slovakia and as much as 3.9% in Hungary. From this, 0.2-0.5% of GDP is actual fresh money inflow disbursed during these weeks. Nonetheless, in the second half of this year, when we expect economies to start recovering from the current slump, the appetite for Eurobond issuance could slowly increase again.
The good news amid the increase in financing needs is that central banks have put their arsenal in place to provide support to bond markets. The Croatian, Polish and Romanian central banks already started purchases on secondary markets, with amounts of HRK 4.3bn, while purchases in Poland nearly reached PLN 50bn, i.e. almost the half of the additional financing needs that the government announced some weeks ago. In Czechia, the central bank said that it will only provide support if it sees excess market volatility. However, private market participants have already taken care of a large part of the job. This could have been fueled by expectations of even lower rates in Czechia, in which case moving from central bank deposits into government banks could be a good protection. In Romania, the amount of purchases was not disclosed by the NBR, but yields declined substantially (from around 6% at the 10Y tenor to well below 5%) after the NBR flagged that it will carry out purchases. Hungary again took a more unorthodox move after the MNB announced that it is providing collateralized lending at 3Y and 5Y in an unlimited amount to banks. Debt managers could sell above the planned amounts at auctions in recent weeks in Hungary, indicating that the tool of the MNB is working. In Slovenia and Slovakia, bond sales were also very successful, as the ECB is providing the backing.
Thanks to the dampened rate and yield outlook globally, and relatively favorable fundamentals, we expect yields to be well anchored in CEE. In some countries where yields fell more notably, we could see some slight increase towards the year-end. This is true for Poland and Czechia mostly. In Hungary, after the decline in yields in the last 1-2 weeks, some marginal upward drift can be expected by the year-end. In Serbia and Croatia, we see yields going slightly down, while Slovakia and Slovenia could see stable yields amid the support of ECB. In Romania, we currently pencil in yield declines, but this is conditional on a gradual reduction of the twin deficit.