Croatia is selling its first euro-denominated bonds in three years, betting investors will back government pledges to curb the budget deficit, while prospects for European Central Bank easing lift sentiment in the region.
The Finance Ministry is meeting investors this week to raise about 1 billion euros ($1.37 billion), Miljenko Ficor, head of its treasury department, said on May 8. The yield on its junk-rated Eurobonds due July 2018 has tumbled 87 basis points this year to 3.14 percent by 9:54 a.m. in Zagreb, reaching a record low of 3.02 percent this month. The premium over German debt is 290 basis points, down from more than 400 before Croatia joined the European Union last July.
The nation is tapping into a surge in demand for fixed income fueled by bets that ECB President Mario Draghi will boost stimulus to spur inflation. Prime Minister Zoran Milanovic’s government, whose debt load is lower than for the euro area, has vowed to cut the deficit to below the EU limit of 3 percent of gross domestic product in 2016 from 4.4 percent this year.
“Croatia is underrated and a good credit story,” Lutz Roehmeyer, a money manager overseeing $1.1 billion at LBB Invest, who is seeking to buy the new securities, said by phone from Berlin on May 19. “There is a lot of pent-up interest in Croatia because it’s not a regular issuer.”
The notes may be priced to yield 4.5 percent to 5 percent and the proceeds will cover Croatia’s borrowing needs for the rest of the year, according to the treasury’s Ficor.
Croatia is relying on subsidies to revive its $60 billion economy that is set to contract for a sixth year. The EU has earmarked as much as 10 billion euros for the country in its budget through 2020, which the government in Zagreb plans to use to revamp communist-era infrastructure and diversify an economy dominated by tourism and services.
The unemployment rate in the former Yugoslav republic fell to 22.3 percent in March from a 12-year high of 22.7 percent a month earlier, the statistics office said on April 30.
Croatia’s yields don’t compensate for the risks linked to the economy and budget, according to Dmitri Barinov, a money manager overseeing $2.7 billion of debt at Union Investment Privatfonds GmbH. The Frankfurt-based company will seek a premium of about 50 basis points over the current secondary-market rates to buy the new notes, he said by phone yesterday.
“I’m not sure they will be so generous as the market is strong now,” Barinov said. “Croatia is now expensive. I am still concerned about the fiscal situation and high unemployment.”
The country’s public debt will probably increase to 69 percent of GDP this year from 45 percent in 2010, compared with the euro-area average of 96 percent, according to European Commission estimates. Moody’s Investors Service rates the sovereign Ba1, the highest non-investment grade, on par with neighboring Hungary and three steps above Serbia, a non-EU country and another former Yugoslav republic.
Croatia last tapped foreign markets in November 2013, paying 350.40 basis points over Treasuries to sell $1.75 billion of debt due January 2024. The yield increased three basis points today to 5.15 percent, down from a peak of 6.39 percent on Dec. 5. The country has about $11 billion of Eurobonds coming due over the next 10 years, including six dollar-denominated securities and two notes in euros, according to data compiled by Bloomberg.
The country’s dollar debt has returned 6.9 percent this year, compared with a 7.1 percent average advance for the developing-nation debt worldwide, according to Bloomberg USD Emerging Markets Sovereign Bond Index. (BEMS) Bonds have extended gains this month on speculation the ECB will ease monetary policy at its next meeting on June 5 to tackle the risk of deflation.
“It’s a good time for them to issue,” Stephane Mayor, an emerging-markets money manager at Groupe Edmond de Rothschild in Geneva with $400 million under management, said by e-mail on May 19. “Their euro-denominated yield curve is poor and a new bond in the five- to 10-year area should be welcomed by investors.”
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