Who Fears QE's Demise? Not These Emerging European Economies

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  • Officials say central Europe can withstand ECB ending stimulus
  • Region set to benefit from rating upgrades, narrower deficits

GAM's Hatheway Expects ECB to Taper Through 2018

While the prospect of the European Central Bank’s withdrawal of monetary stimulus is bringing closer the end of an era of record-low borrowing costs in emerging Europe, it isn’t worrying countries both inside the euro area and those just on its eastern fringe.

Governments from Slovakia to Croatia can boast tighter fiscal policies, better credit ratings and more diversified debt profiles. That means they can handle any potential fallout from higher borrowing costs and lower demand once the ECB turns off the taps, officials at the annual Euromoney central and eastern European forum in Vienna said on Tuesday.

“Financial markets have already priced in improvements in the economy and the fiscal position,” said Croatian Finance Minister Zdravko Maric, who predicts his country’s return to investment status in two years following its recent upgrade by Fitch Ratings. “But at the end of the day, what happens in global markets is something we need to be aware of.”

Emerging markets may still prove to be vulnerable. The 2013 “taper tantrum,” induced by the U.S. Federal Reserve’s suggestion of ending its unprecedented emergency measures, ripped through assets of developing nations. Structural deficits will probably widen further in countries “with the least favorable fiscal position,” such as Romania and Hungary, according to Moody’s Investors Service.

“Fiscal space will shrink for many central and eastern European countries in 2018 as revenue growth slows in line with moderating economic growth, and interest costs gradually rise, driven by the normalization of monetary policy,” Daniela Re Fraschini, an associate vice president at Moody’s, said in a report on Wednesday.

To get in front of any rise in borrowing costs, Macedonia has already sold 500 million euros ($612 million) of seven-year bonds at a record-low coupon. Euro-area member Slovenia borrowed the same amount last week at a spread half a percentage point lower than a year ago.

‘Good Position’

“I believe that spreads will remain contained,” Marjan Divjak, the director general of the treasury directorate at the Slovenian Finance Ministry, said at the conference. “We don’t exclude, obviously, spreads widening, even significantly, but we would be in a good position.”

Serbia is a case in point. With the help of a loan program from the International Monetary Fund, the country erased a budget deficit and received sovereign-credit upgrades from S&P Global Ratings and Fitch in December. Growth has also stabilized and public debt fell.

“Serbia has decreased its gross financing needs, so we are less exposed,” Branko Drcelic, the Balkan country’s director of public debt administration, said in an interview on the sidelines of the conference. “We do expect yields to rise. But on the other side, we have a better credit rating and fiscal performance.”

Euro member Slovakia says it’s already experienced the impact of tapering, with the ECB’s purchases of its bonds declining since last year. A lower-than-planned fiscal deficit in 2017 also means that funding needs have fallen and the government “is flush with cash,” said Daniel Bytcanek, the director of Slovakia’s debt-management agency, Ardal.

In Demand

For now, investors are snapping up debt at record-low yields. In the year’s first emerging-nation bond sale, Slovenia saw demand reach 3.4 billion euros, and Slovakia’s sale of 10- and 20-year bonds Monday attracted bids of about 1 billion euros, more than five times the amount raised. Macedonia got 2.4 billion euros in offers for its issue.

Slovenia’s 2028 securities rose on Wednesday, sending the yield down to just over 1 percent. The yield on Macedonia’s euro-denominated bond maturing in 2025 was little changed at 2.5 percent a day after losing 12 basis points.

“We caught the right moment and we’re glad that demand from international investors was huge,” Macedonian Finance Minister Dragan Tevdovski said in Vienna. “We significantly reduced the risk for refinancing in the future.”

— With assistance by Gabriella Lovas

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