Tim Gosling in Prague
January 17, 2013
Slovakia is planning to continue its rapid-fire debt issuance over recent months with a 10-year benchmark bond in the first quarter, an official said on January 16. The issue is likely to eventually rise to as much as €3bn as Bratislava takes advantage of the ongoing emerging market debt rally while it lasts to reach a total 2013 borrowing target of over €14bn.
"We will probably be looking at doing a 10-year benchmark, as that is the missing point on our curve," Daniel Bytcanek, director of the country's debt and liquidity management agency Ardal told EuroWeek Emerging Markets. "We would want the final size of that bond to be €3bn, but we probably won't sell that all in one go. First we will do a syndicated deal of around €1.5bn and then add another €1.5bn slowly via auctions."
Slovakia announced on December 14 that it plans to issue up to €14.5bn in debt in 2013, on top of the frontloading it completed last year, a large chunk of that coming via a series of issues towards the end of the year. Rated 'A2/A/A+', Slovakia’s financing needs in the 2013 budget are €8bn.
Following on from the hectic schedule in the fourth quarter, Ardal hasn’t hung around in the new year. It sold €1.5bn of 3.875%, 20-year paper on January 8. The issue was originally intended to be limited to €500m, but the government was persuaded to sell more after demand reached €900m in the first two days of pricing, the official said. "That deal started as a private placement, but demand was so good we managed to build a bigger deal around it," said Bytcanek. "The plan was originally to leave €200m-€300m in our own portfolio but demand was so good for the paper that we will probably now sell that on."
The overall debt issue plan for the year commits Bratislava to at least five new bond issues at an estimated value of €10.5bn, reported the Wall Street Journal. On top of that, the debt agency said it could also tap four existing bonds for another €4bn. All that said, the debt agency points out that the pre-funding of 2013 borrowing achieved last year will offer it the space to be adaptable.
That's a clear nod to the current debate over how long the emerging market bond rally can last. Powered by liquidity action from the US Federal Reserve and European Central Bank (ECB), the hunt for yield has so far outpaced concerns expressed at the end of last year that a bubble was developing. However, as the raft of issues from Visegrad states in the fourth quarter attest, issuers are wary that the current appetite – which has seen the yield on Slovakia's benchmark 4% 2020 euro-denominated debt fall from 5.458% at the start of the year to 2.349% in November – could unwind anytime.
With that in mind, Ardal ended up issuing a total of €8.15bn in debt in 2012, according to KBC Bank, compared with its original plan to borrow €7.5bn. Analysts had originally forecast Slovakian bond issues in 2013 at around €6bn, and the debt agency has been careful to note that the all issues in the announced plan are contingent on market conditions and investor demand.
The raised borrowing target suggests a move in December by the Ministry of Finance to open discussions on adapting the constitutional debt brake by omitting the financing reserve (around €5bn currently) is seen as a done deal. The law, passed in late 2011, applies automatic stabilisers should state debt rise above 53% of GDP. Analysts at Citigroup suggest it will reach 52.1% by the end of 2012.
Deputy Finance Minister Vazil Hudak told Bloomberg in November that the legislation is limiting the government's ability to take advantage of declining yields, and said that Ardal would probably accelerate bond buybacks to reduce state debt. "We don't plan any significant issuance in the near future," he claimed.
However, as the raised borrowing target suggests, there is a possibility of a real need for cash next year to support the budget. The government has committed to squeeze the deficit below 3% of GDP, following a target of 4.6% in 2012, but is struggling to keep to a programme that analysts argue is overly ambitious due to the slowing economy. With little space to cut spending anyway, the populist Smer administration pinned its hopes on revenue-raising measures to achieve the balance, but it has spent most of 2012 admitting that the volume of cash collected through its higher taxes is lagging.
Although Slovakia looks as though it finished last year as the Eurozone's fastest growing economy at around 2.6%, that performance was driven almost exclusively by large international investors – carmakers in particular – which mostly face the export markets. Their weight in the economy has allowed them to press for generous tax breaks, while they're unable to help too much with the country's dreadful unemployment problems, with the jobless rate close to 15% for several years.
In addition, recent data points at a slowdown in the auto sector in the final couple of months of 2012, which shrank industrial production growth in November to 5.2% year on year. While most EU states would bite off your hand for that sort of performance, the pace of growth in July was barreling along at closer to 20%. Analysts expect most CEE economies to enjoy a stronger year in 2013, but Slovak growth is anticipated to slow to around 1%.
There is, therefore, a clear threat that the 2013 budget targets will also be under pressure, unless the Eurozone – to which over 80% of Slovak exports head – sees a dramatic recovery. One blessing, according to the WSJ, is that Slovakia's redemption profile puts the country in a relatively comfortable position in the next few years. According to KBC data, the country will have €3bn-€4bn refunding needs each year from 2013 to 2017.
However much debt Ardal manages to get away this year, it's likely to be denominated in a variety of currencies once again, the debt agency said. A bid to diversify its investor base, as well as avoid the battered euro, in 2012 saw Bratislava issue bonds in Czech crowns, Swiss francs and US dollars through the year, on top of a couple of local currency issues.
Joining several CEE peers, Slovakia said in November that it plans to issue €400m (JPY41bn) in samurai bond in the first half of 2013, likely May. In the wake of two successful issues in Tokyo this year from Poland, the Czech Republic, Croatia and Latvia have also said they are mulling yen bonds as Japanese investors hunt for yield outside their traditional markets in Western Europe. The rise of Slovakia's ratings to 'A2/A/A+' puts it at a level acceptable for the Japanese market, on which it was last active in 1998.