Romania May Drop Yield Cap `Illusion' as Funding Lags
Aug. 26 (Bloomberg) -- Romanian Finance Minister Sebastian Vladescu talks about the outlook for the country's economy and bond issuance. He speaks on Bloomberg Television's "On The Move" with Francine Lacqua. (Source: Bloomberg)
Romania may be forced to abandon its cap on borrowing costs as inflation accelerates and investors seek higher yields.
The European Union’s second-poorest country failed to sell three- and five-year bonds in August after investors demanded yields above the Finance Ministry’s 7 percent limit. The nation raised 3.85 billion lei ($1.2 billion) through sales of six-, nine-and 12-month Treasury bills, 16 percent less than its monthly funding target of 4.6 billion lei.
“This strategy will eventually be abandoned,” Vlad Muscalu, an economist at ING Bank Romania SA, said by phone from Bucharest. “The fact the ministry managed to sell only short- term debt increases its financing needs for the next six months and puts pressure on borrowing costs.”
Romania needs funding to cover a budget deficit that swelled to 8.3 percent of gross domestic product last year during the country’s worst recession since the end of communism. Inflation accelerated to 7.1 percent in July as the government raised the value-added tax by 5 percentage points to help meet conditions for a 20 billion-euro ($25 billion) bailout from the International Monetary Fund and EU.
In the past four months, the Finance Ministry rejected all bids for three-, five- and seven-year bonds at eight auctions. The yield on the 6 percent leu note due in April 2015 rose 1 basis point to 7.451 percent, the highest in almost two weeks, at 3:42 p.m. in Bucharest today. This compares to a 6.993 percent yield on April 15, the last time Romania sold debt at that maturity.
‘Wouldn’t Want To’
Asked whether the government might be forced to pay more than 7 percent for leu-denominated treasuries because of rising financing needs, Finance Minister Sebastian Vladescu said on Aug. 26 that he “wouldn’t want to.”
Romania has sold 7.85 billion lei of domestic debt since the beginning of May, less than half of its 18.35 billion-lei target, according to data compiled by Bloomberg. The Finance Ministry plans to sell 4 billion lei in six- and 12-month bills next month and 600 million lei in five- and 10-year bonds, according to a statement published on its website today. The administration last sold 10-year bonds on July 22, when it sold 103 million lei, falling short of its planned amount of 400 million lei.
Looking Abroad
To make up for the shortfall, the government is seeking to raise at least 1 billion euros on international markets later this year. The sale would be the second in 2010 and is part of a plan to raise as much as 7 billion euros over three years.
Romania’s funding needs may jump next year to as much as 6.3 billion lei a month from the 4.6 billion lei planned for this year if the government relies on T-bills for the rest of 2010, Muscalu wrote in an Aug. 20 report.
“It’s practically an illusion to believe that you can finance your deficit at a cost below 7 percent given current conditions,” he said. “If this strategy is extended to the early months of next year, monthly funding needs could even jump to about 8 billion lei.”
Romanian inflation accelerated after the government increased the VAT to 24 percent to help bring the 2010 budget deficit within the IMF’s target of 6.8 percent of GDP. The central bank this month raised its year-end inflation outlook to 7.8 percent from 3.7 percent. Its target is 3 percent.
‘Pay More’
“At the end of the day, they will have to probably pay more than 7 percent,” Gyula Toth, an emerging-market strategist at UniCredit SpA in Vienna, said in a phone interview. “They’ll probably do that later rather than sooner, depending on the Eurobond’s success.”
Standard & Poor’s rates Romania’s long-term debt BB+, one step below investment grade, while Moody’s Investors Service rates at Baa3, its lowest investment grade. The cost of insuring Romania’s debt against default was little changed today at 374.2 basis points after rising to a five-week high of 376.7 on Aug. 26. That compares with 333.3 for Ireland, which had its rating cut to AA- by S&P on Aug. 24.
Romania sold 1 billion euros of five-year bonds with a 5 percent coupon in March in the country’s biggest debt offering. The government revived the sale, which was canceled in November, to take advantage of renewed investor confidence after Prime Minister Emil Boc pledged austerity measures in the 2010 budget.
The yield on the 2015 euro-denominated note was little changed today at 5.743 percent after rising to a four-week high of 5.757 percent on Aug. 25. It fell to 4.957 percent on March 12, its first day of trading.
“If I were the Finance Ministry I wouldn’t bet” on optimism coming back by the time Romania returns to international markets, said Lars Christensen, chief emerging- market analyst at Danske Bank A/S in Copenhagen.
“I expect weak to no demand for Romania’s bond and we don’t recommend investors to buy Romanian debt at the moment,” he said.
To contact the reporters on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net; Irina Savu in Bucharest at isavu@bloomberg.net;
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