No Government No Problem for Balkan Bond as Investors Hunt Yield

  • Croatia’s Eurobonds rally to record despite cabinet’s collapse
  • Tourism boom helps economy that’s recovering from 6-year rout

Some nations don’t even need a government for investors to snap up bonds and send their borrowing costs to record lows in the post-Brexit hunt for yield.

That’s what’s happening in Croatia, whose Eurobonds are heading for their fifth straight quarterly gain even after the country’s government imploded in June, triggering early elections. The Adriatic nation’s Eurobonds handed investors a 1.5 percent return last month, matching the payout for 67 nations in the Bloomberg USD Emerging Market Sovereign Bond Index.

The European Union’s youngest member is now counting on a record year in its tourism industry to help it recover from a six-year recession. That has helped temper fallout from the political turmoil and lured investors who, finding it tough to book returns in a world where almost $12 trillion of government debt pay negative rates, are pouring funds into emerging-market debt at a record pace.

‘‘Croatia has no real government, but the fundamental picture is much better than two to three years ago, with growth picking up and debt stabilizing,” said Dmitri Barinov, a money manager at Union Investment Privatfonds GmbH in Frankfurt who has an overweight stance on the nation’s Eurobonds in the $2.7 billion he oversees. After the snap elections, “with the EU’s budget-deficit rules, there’s not much the government can do wrong,” he said.

President Kolinda Grabar Kitarovic has called general elections for Sept. 11 after non-partisan Prime Minister Tihomir Oreskovic’s three-party coalition collapsed in a conflict-of-interest scandal. The breakup of the unlikely allies, who formed a cabinet only after weeks of wrangling following inconclusive elections, shelved Oreskovic’s plan to cut public spending and debt and reduce the government’s role in business by selling state assets.

While Oreskovic’s economic overhaul may be delayed, revenue from tourism, which accounts for a fifth of the economy, is seen exceeding 8 billion euro ($8.9 billion) in 2016. As Germans, Austrians and other Europeans forego trips further afield after an uptick in violence in the eastern Mediterranean and Turkey’s failed coup, that may boost economic growth.

According to a Bloomberg survey of 10 economists, the economy of 4.1 million people may expand 1.8 percent this year. While that’s the slowest pace in the European Union’s eastern wing, it’s welcome relief from the recession that erased more than a 10th of economic output in nominal terms from 2008 to 2014. 

Additionally, over the past nine weeks investors have added a record $12.9 billion to exchange-traded funds that buy emerging-market stocks and bonds after the U.K.’s vote to leave the European Union fueled speculation the European Central Bank will have to extend its stimulus program.

Even after the rates on Croatia’s Eurobonds fell to all-time lows, they keep offering an “attractive” premium, according to Union Privatfonds’ Barinov.

Market ‘Optimistic’

Investors have taken note. The yield on Croatia’s $1.75 billion Eurobond due 2024 slid 1 basis point to 4.27 percent by 3:29 p.m. in Zagreb, a record low and extending the decline since the June Brexit referendum to 52 basis points.

Croatia is rated two steps below investment grade at all three major rating firms. The fiscal deficit will probably narrow to 2.6 percent of economic output from an average 5.6 percent in the seven years ending 2015, according to Fitch Ratings.

The ratings company sees either the Social Democrats or the conservative Croatian Democratic Union, which have dominated politics here since Croatia’s 1991 independence, forming a government with the smaller Bridge party of independents and mayors after the election.

“The market is optimistic as Croatia’s economy is unlikely to get any worse,” said Andreas Rein, a money manager who helps oversee $2 billion in eastern European debt at Uniqa Capital Markets GmbH in Vienna and has an overweight recommendation on Croatian debt.

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