Russia Outflows Find Refuge in Romania Bonds: East Europe Credit

Bonds from Romania and Hungary are the biggest beneficiaries in European emerging markets from risk-averse investors pulling cash out of Russia.

Eurobonds from the European Union nations have returned 5 percent and 4.7 percent, respectively, since President Vladimir Putin’s incursion into Ukraine’s Crimea region on March 1. Even as Russian debt has gained the past two weeks, it is down 0.6 percent in the period, one of two decliners among 56 nations in the Bloomberg Dollar Emerging Market Sovereign Bond Index.

Europe’s economic recovery is helping the post-communist countries curb budget deficits, attracting investors to their debt as Russia is hit by the worst capital outflows since 2008 over the conflict with Ukraine. Romania, the EU’s second-poorest nation, and Hungary posted their best current-account balances on record last year, leaving them more resilient against global market turbulence.

“As Romanian and Hungarian fundamentals improve, the bonds are luring investors looking for safer alternatives to Russia,” Roxana Hulea, an emerging-markets strategist at Societe Generale SA, said in a phone interview from London yesterday. “They wouldn’t escape unscathed should the crisis in Ukraine escalate, but that’s not our main scenario.”

SocGen cut its view on Romanian dollar debt to underweight yesterday after the rally strengthened the sovereign’s bonds to the extent they “can no longer be classified as high yield,” Regis Chatellier, a London-based director of emerging-markets credit strategy, said in a report to clients. The French bank recommended increasing exposure to Hungary and South Africa.

Regional Underperformance

The yield on Romania’s international notes due August 2023 fell two basis points today to a 12-month low of 4.01 percent by 5:30 p.m. in Bucharest. The rate is down 82 basis points, or 0.82 percentage point, this year and compares with a 4.60 percent yield on Hungary’s February 2023 debt, according to data compiled by Bloomberg.

While Romania and Hungary bond returns exceed the average 4.3 percent gain on emerging-market debt since the end of February, eastern Europe as a whole has lagged behind, earning 3.2 percent amid concern the Russia-Ukraine conflict could escalate and weaken growth prospects for the region.

Polish dollar bonds have returned 1.5 percent in the period and Latvia has gained 0.8 percent. South African bonds made 4.6 percent, with Turkey up 7.9 percent and Argentina 12 percent.

‘Price Out’

Capital flows out of Russian markets may now be reversing as investors “price out” the risks of Putin invading or annexing other regions in Ukraine, Jack Arnoff, a partner at Elbrus Capital Partners in London, said by e-mail yesterday.

Romania’s gross domestic product probably rose 3.9 percent in the first quarter from a year earlier, with Hungary expanding 2.7 percent, according to median estimates in Bloomberg surveys of economists before the data is published this week. That compares with analyst projections for economic growth of 1.1 percent in the euro area and 0.7 percent in Russia.

Improving growth and foreign investment helped narrow Romania’s current-account deficit to 1.1 percent of GDP last year, the smallest gap since at least 2004. Hungary’s current account, the broadest measure of a nation’s trade, had a record 3 percent surplus in the fourth quarter, compared with a 7.4 percent deficit five years earlier.

“There is an increasing trend of capital inflows into Romanian bonds because of the Ukraine crisis,” Diana Popescu, deputy head of the government’s debt-management department, said in an interview in Bucharest yesterday. “Investors are now looking at those countries that have macroeconomic stability and Romania looks much better than others.”

‘One Alternative’

The cost to insure Romanian bonds against non-payment for five years using credit-default swaps fell 39 basis points this year to 145 basis points yesterday, matching a six-year low reached last week, according to CMA data. The contracts, which fall as perceptions of creditworthiness improve, slid 70 basis points to 190 for Hungary in the period, while surging 57 basis points to 223 for Russia.

“If I were to pick one alternative to Russia, it would be Romania,” Stanislava Pravdova, a Copenhagen-based emerging-markets analyst at Danske Bank A/S, said in a May 12 interview.

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