Positive CEE sovereign debt outlook despite rising borrowing costs

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Central and Eastern European sovereign borrowers faces enormous volatility this year, with a war in the region who has sharply rising inflation and rising interest rates that have pushed up their cost of borrowing. But according to investors, the outlook is positive due to the low debt-to-gross domestic product ratio and inflation which is expected to decline next year.

Speaking to the the CEE virtual event hosted the OMFIF Sovereign Debt InstituteCEE sovereign debt managers raised concerns about rising borrowing costs and what they were doing in response to volatility.

Marjan Divjak, director general of the treasury department at Slovenia’s finance ministry, said rising costs were “a very important factor”. “We are doing everything we can to contain the credit gap,” Divjak said. “We are designing the medium-term debt management strategy to do everything on our side to prevent the credit spread from widening significantly from here.”

Zoltán Kuráli, chief executive of Hungary’s debt management agency, said they were structuring their debt to ensure they were well positioned for when the cycle turned and inflation peaked.

“Our response to that is that in the past we’ve issued very little floating rate debt and now we’re issuing more floating rate debt,” Kuráli said. “Obviously it’s a gamble that goes horribly wrong if yields continue to rise for years, but I guess it’s reasonable to expect there to be a spike in inflation and a peak performance environment at any given time.”

Stefan Nanu, head of public debt and public treasury management at Romania’s finance ministry, said it was important “to try to find that combination of instruments” as well as a combination of external and domestic debt. that doesn’t put too much pressure on one curve.

“Financing costs are very important because it is taxpayers’ money that we have to finance and therefore the lowest possible costs in the medium and long term is a clear objective of the debt management strategy,” said Markus Stix, Director General of the Austrian Treasury. .

Stix also agreed that a diversification of funding was important, pointing to the launch of Austria’s treasury bill program last year. In October, Austria issued its green treasury bill – the first such instrument in the world.

For investors, rising financing costs in the region present a different proposition. Carlos de Sousa, emerging market debt strategist and portfolio manager at Vontobel, said high borrowing costs for CEE sovereigns were not a major concern but rather an attractive opportunity.

“When you’re going to a primary issue and if the macro doesn’t look very bad and in most countries it’s fine, then higher borrowing costs in the primary issue is actually a point of attractive entry,” de Sousa said. “In this region in particular, I’m not terribly concerned about high borrowing costs that undermine medium-term debt sustainability assuming global inflation declines.”

Simon Quijano-Evans, chief economist at Gemcorp Capital, echoed de Sousa’s positivity and said he was “optimistic” on inflation, saying that by the middle of next year, inflation year-on-year will be much lower than it is now.

Quijano-Evans said that despite the tough conditions, with the largest ever outflows from emerging market bond funds this year and net issuance down to about a fifth of normal supply, the outlook was brighter.

Quijano-Evans and de Sousa said the sustainability of CEE sovereign debt was not a major concern. “If you look at debt to GDP and the fiscal context, all of the countries here are among the best performers in the world with less than 80% debt to GDP and less than 60% cases, so I no there is a question of [debt] sustainability here,” Quijano-Evans said.

“I don’t have any particular concerns about debt sustainability in the region,” de Sousa said. “One country that looks a little worse in some way – I’m not saying its debt burden is unsustainable – but where I might have some concerns is Montenegro.” But the effective interest rate is so low that it compensates for a very high debt-to-GDP ratio. But I’m still concerned that I don’t have a clear path to long-term fiscal consolidation there.

Burhan Khadbai is Head of Content at OMFIF’s Sovereign Debt Institute.

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