Erste Group: CEE Macro/Fixed Income Daily

Analysts’ Views: HU Budget: Yesterday, the European Commission announced that they would propose to lift the suspension of EUR 495mn of cohesion payments to Hungary because the country had taken the steps recommended by the EC to correct its excessive deficit. The Ecofin will decide on the EC’s proposal at their meeting to be held on June 22. However, the EC has not indicated that Hungary can exit the Excessive Deficit Procedure (EDP) as the deficit figures are still relatively close to the threshold and they are only expected to be reached due to one-off measures. Hungary has now been in the EDP since EU accession in 2004. The EC expects the budget deficit to reach the target of 2.5% of GDP this year and they have also cut their deficit forecast for 2013 slightly from 2.9% of GDP to 2.7% of GDP. The latter, however, is still higher than the government’s prediction of 2.2% of GDP. We stick to our budget deficit forecasts of 2.5% of GDP for both years. We still see an IMF agreement as necessary to regain credibility which would lead to considerably lower financing costs in the medium term. RO Budget: Besides abandoning the current flat tax of 16% (most probably this will come into effect next year), and replacing it with progressive taxation (new tax brackets of 8%, 12% and 16%), the socialist-liberal coalition currently in power is now considering levying an extra tax of 32% on civil servants pay, equal to RON 4,500 or more a month (EUR 1000). The extra tax will only be charged on the part of salaries in excess of RON 4,500. A rough estimate puts the additional income for the state budget at around RON 1bn/year (EUR 225mn). However, the key question remains whether the new government has the capacity to improve the quality of public spending. For the time being we see a budget deficit of 3.4-4% of GDP (ESA) in 2012 and a EURRON of 4.4 in December 2012 but the latter is conditional upon Greece remaining in the Eurozone. Traders Comments: CEE Fixed Income: The CEE fixed income safe havens, Slovakia and the Czech Republic, did well yesterday with yields on benchmark local currency government bonds pulled down in the wake of new lows on German Bund yields. Asfinag, the Austrian motorway agency and sovereign proxy, also successfully placed a 20y EUR 1 bn bond at ms + 85, 10 bps below initial spread guidance. That said, credit premiums on Czech CDS widened and the Koruna weakened significantly versus EUR, indicating that all is not well in the CEE region. Both HUF and PLN were under pressure in FX markets as well but bond markets have reacted differently. Whilst both HUF bonds and Rephuns came under pressure, POLGB yields backed up whilst Polish Eurobonds were strongly in demand. In fact, it was extremely challenging getting an offer at the long end as real money accounts bid competitively in size for longer dated Polish Eurobonds. Romania remains in a world of its own, isolated to a large extent from the turmoil in global markets whilst Croatian bonds look to have benefited from what looks suspiciously like another round of FX intervention from the central bank. We continue to see relative value in polish bonds.For more details please go to our Comments section.

Erste Group: CEE Macro/Fixed Income Daily

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