Emerging Markets, EBRD editions, May 15 2014
Growing interest in Eastern European local currency debt markets could lead to long-awaited corporate issuance in these sovereign-dominated markets, according to economists, providing a new source of capital for companies in the region to grow.
Several Eastern European sovereigns have already done most of their fund-raising for the year, but appetite for new paper remains. “Poland has already done 80% of its required issuance on the local bond side for the whole of the year,” said Commerzbank’s head of EM research, Simon Quijano-Evans. “I’m noticing that the supply is not high enough in emerging market bonds, especially on the external side, meaning you should start to see new funds moving into the local currency space,” he said, referring to US pension funds who he believes are starting to look at emerging market debt for the first time. “As they do that, the CEE region stands at the top because of its liquidity and its proximity to the Eurozone.”
And if sovereign debt supply is already largely exhausted for the year, there is likely to be greater appetite further down the curve, he said. “It definitely creates a better environment for corporate issuance. The fiscal backdrop in emerging markets from a debt and budget point of view is better than in many developed markets. That will allow corporates to come to market.”
At the same time, local pension funds are also likely to diversify into corporate holdings, he said: “in Poland in particular.”
Corporates have not tended to use local currency markets in Eastern Europe for their funding, partly because many are cash-rich anyway, and partly because of the availability of bank lending. “In Central Europe there is much more bank lending, or the money comes from corporate parents: three or four of the top companies in Hungary are foreign-owned, and they go to the parent company for financing, not the local corporate bond market,” said Charles Robertson, chief economist at Renaissance Capital. He said bond markets were more significant for companies in Russia, and said that while Russian corporates tended to use dollar markets, those markets were no longer available to them because of investor attitudes towards Russia’s involvement in Ukraine. “So those [dollar] markets are pretty well closed.” This, too, may prompt a closer look at local capital market fundraising opportunities.
Quijano-Evans said that local bond markets have developed well. “They’ve increased liquidity over the last 15 years tremendously. You have seen the non-resident ownership ratio increase substantially, especially in Hungary and Poland, and it will continue to do so.” The ratio in those countries stands at around 45%.
He also pointed to the ease of access that has come with Russia gaining Euroclear ability. “That is the main way that foreign investors are going to get access to Russia in the next 12 months, given that they are not going to issue any external bonds now.”