Second-Poorest EU Nation Yields Best Bonds
Romania, the second-poorest member of the European Union, is lavishing bond investors with the best returns in emerging markets on prospects for interest-rate cuts and a loan from the International Monetary Fund.
An index of local-currency notes gained 1.8 percent since May 22, when Federal Reserve Chairman Ben S. Bernanke said policy makers may pare asset purchases, the biggest advance among JPMorgan Chase & Co.’s emerging-market local-bond index. The global composite gauge lost 3.9 percent in the period.
Romania, whose economic transition away from communism has been hobbled by graft and political instability over two decades, is luring bond investors as the nine-month-old government cuts spending and completes a 4 billion-euro ($5.3 billion) IMF stand-by loan deal. Inflation is the slowest in 13 months, allowing the central bank to lower rates to feed an economic recovery and the cabinet to shore up financing with a foreign-currency bond sale last week.
“There are not many central banks left in the emerging-market world who are still in an easing cycle,” Abbas Ameli-Renani, a strategist at Royal Bank of Scotland Group Plc in London, said by e-mail on Sept. 13. “Romania’s credibility stands in good shape among international investors.”
Leu debt has had positive returns in 19 of the past 20 months, according to Bank of America Merrill Lynch indexes. Poland’s zloty notes, the most-liquid fixed-income instrument among former communist EU members, showed losses in five of eight months this year, the data show.
The Balkan country of 20 million people, for decades one of Europe’s most restrictive communist regimes under Nicolae Ceausescu, is coming into the spotlight as the government carries out one of the EU’s biggest deficit-reduction programs. It envisages cutting the fiscal shortfall to 2.3 percent of gross domestic product this year from 7.2 percent in 2009.
Romania’s annual inflation rate dropped to 3.7 percent last month from 6 percent in January. It will fall to 3.1 percent in December, the central bank projected on Aug. 7 in a second downward revision of its forecast this year.
Slowing price growth is creating “more room” to reduce official borrowing costs, Governor Mugur Isarescu said on Aug. 5, when policy makers lowered the benchmark rate by half a percentage point to a record-low 4.5 percent. The rate will decline to 4 percent in December, according to the median forecast from a Bloomberg survey of 15 economists.
That makes the country one of three emerging markets, alongside Russia and Chile, where borrowing costs are set to fall by at least half a percentage point in less than four months, data compiled by Bloomberg show. While borrowing costs in Turkey and Brazil are set to rise, Poland’s interest rates will stay unchanged, according to separate surveys.
“Local-currency bonds should be among the best in a one-year horizon,” Martin Marinov, who helps oversee $1 billion of emerging-market debt at Raiffeisen Kapitalanlage in Vienna, said by e-mail on Sept. 12. He said he is overweight on leu bonds.
While Romania has attracted bondholders, the IMF still wants Prime Minister Victor Ponta to boost efficiency in the public sector, especially in health care, and tackle corruption, which according to Berlin-based Transparency International is the fourth-worst in the EU after Italy, Bulgaria and Greece.
The IMF also wants Ponta to sell stakes in utilities, including natural-gas producer Romgaz SA, hydropower plant Hidroelectrica SA and nuclear operator Nuclearelectrica SA, it said on July 31. Romania’s per-capita income, adjusted for purchasing power, amounts to 49 percent of the EU average, Eurostat data show.
The IMF’s board is set to approve the stand-by loan, which it will provide jointly with the EU, in the last 10 days of September, Budget Minister Liviu Voinea said on Sept. 5. The IMF is scheduled to discuss the loan on Sept. 27, according to a calendar of meetings published on the lender’s website.
Yields on five-year leu notes may rise to more than 5.5 percent from 4.67 percent today if the Fed’s stimulus rollback is “sharper,” weakening sentiment toward riskier assets, according to Erste Group Bank AG. That compares with yields of 3.81 percent on similar-maturity Polish notes and 5.41 percent on equivalent Hungarian securities.
“The price of Romanian assets will undoubtedly come under pressure if external sentiment takes a turn for the worse,” Erste analysts, led by Vienna-based Juraj Kotian, said in a research note two days ago. “This will make it more difficult for the central bank to continue the monetary easing cycle.”
Romania is rated Baa3 at Moody’s Investors Service, its lowest investment grade, and at BB+, the highest junk rating, at Standard & Poor’s, data compiled by Bloomberg show.
The yield on the 1.5 billion euros of September 2020 notes Romania sold on Sept. 12 fell one basis point or 0.01 percentage point, to 4.6 percent at 12:01 p.m. in Bucharest, compared with a rate of 5.22 percent on equivalent Hungarian euro-denominated debt and 2.46 percent on Polish notes.
Romania has 4 billion euros of debt maturing this year and 7.4 billion euros in debt due in 2014, data collected by Bloomberg show. Last week’s Eurobond sale signals external funding “is done” for this year, Raiffeisen’s Marinov said.
“Though I expect the realization of Fed tapering to exert pressure on emerging assets, Romania will be a regional outperformer,” Ameli-Renani at RBS said.