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CEEMEA Sovereign Credit Navigator – 12 June 2017 Summary

Core Content Overview

This document provides a market update and analysis on CEEMEA (Central and Eastern Europe, the Middle East and North Africa) sovereign credit performance as of 9 June 2017. It highlights key risks, rating reviews, bond performance, and relative value opportunities in the region.

Main Risks and Market Outlook

• Qatar: The market is closely watching the resolution of the GCC crisis with Qatar. The political tensions and weak oil prices are expected to keep Qatar's eurobonds under pressure, particularly the front-end issues. The crisis is anticipated to last longer than the 2014 dispute, which lasted eight months.
• GCC: Qatar is historically wide compared to its peers, and the situation remains uncertain, leading to continued selling pressure. Oman and Bahrain are also at risk due to oil price weakness.
• Banking Sector: Non-resident deposit outflows could pose a risk to the banking sector, which might affect sovereign credit.
• CEEMEA Performance: CEEMEA sovereigns ended the week around 1bp tighter on average. Some SSA countries (Ivory Coast, Ghana) and CEE countries (Poland, Romania, Hungary) outperformed.

Rating Reviews

• Senegal: S&P rated B+ with a stable outlook.
• Serbia: S&P and Fitch rated BB- with a positive and stable outlook, respectively.
• Slovenia: S&P rated A with a positive outlook.

Performance Recap

• CEEMEA $ Sovereigns: Overall tightened by 1bp on average.
• Outperformers: Ivory Coast, Poland, Ghana, Romania, Serbia, Hungary, Kenya, Croatia.
• Underperformers: Qatar, Oman, Iraq, Kuwait, Egypt, Abu Dhabi, Bahrain, Cameroon.
• GCC Impact: The short end of the Qatari $ curve widened by 90bp. The report recommends switching from Oman $27s to Turkey $27s due to the sharp widening of Oman.

Relative Value Opportunities

CEE $ Bonds

• Poland $24s: The report suggests switching from Poland $24s to REPHUN $24s, as the latter offers an attractive differential. There is a good chance that Hungary will not issue eurobonds this year, supporting the trade.
• Polish USD Bonds: Considered expensive versus EUR, especially for 2024 maturities.
• Slovak $22s: Underperformed recently, trading just 10bp inside Poland $22s, despite a two-notch higher rating.

EUR vs. $ Comparison

• Israel: The EUR bond (2.375% '37) is trading wider than the $ bond (4.5% '43), with a differential of -37bp.
• Romania: EUR bond (4.625% '20) is wider than the $ bond (6.75% '22), with a differential of -37bp.
• Russia: EUR bond (3.625% '20) is trading wider than the $ bond (5% '20), with a differential of -2bp.
• Poland: EUR bond (4.5% '22) is narrower than the $ bond (5% '22), with a differential of 2bp.
• REPHUN: EUR bond (3.875% '20) is narrower than the $ bond (6.25% '20), with a differential of 6bp.
• Turkey: EUR bond (5.125% '20) is narrower than the $ bond (7% '20), with a differential of 35bp.
• South Africa (SOAF): EUR bond (3.75% '26) is narrower than the $ bond (4.875% '26), with a differential of 52bp.

CEE € Bonds

• Croatia: The EUR bond (2020) is considered a buy, as it is trading wider than other CEE € bonds. The EUR bond (2021) also shows a positive differential.
• Romania: EUR bonds (2022, 2023, 2024) show positive differentials, suggesting they are relatively attractive.
• Poland: EUR bonds (2021, 2022, 2023) show mixed performance, with some bonds trading wider and others narrower than their peers.

Key Information

• The report emphasizes the importance of monitoring the GCC crisis, particularly with respect to Qatar, due to its potential impact on the region's sovereign credit.
• The CEE region has shown relative strength, with Poland, Romania, and Hungary outperforming.
• There are relative value opportunities in the CEE and SSA regions, particularly in the EUR space.
• The report recommends switching from certain bonds to others based on their relative performance and differential.
• Political and economic factors, including oil prices and potential early elections, are significant influences on sovereign credit performance.

Summary of Recommendations

• Switch from Oman $27s to Turkey $27s due to the widening of Oman.
• Consider switching from Poland $24s to REPHUN $24s for attractive differential and potential supply risk.
• Evaluate EUR bonds for potential value, especially in Croatia and Romania.

Conclusion

The CEEMEA sovereign credit market is influenced by a mix of political tensions, economic conditions, and bond performance. The GCC crisis and oil price weakness are key concerns, while the CEE region shows relative strength. The report provides insights into relative value opportunities and highlights the importance of monitoring these dynamics for investment decisions.