CEEMEA Sovereign Credit Navigator – 3 July 2017 Summary
Core Content
This report provides an analysis of sovereign credit developments in the CEEMEA (Central and Eastern Europe, Middle East, and Eastern Europe) region, focusing on the performance of $ sovereign bonds, CDS basis spreads, and relative value opportunities. The key market dynamics and recommendations are outlined based on recent data as of 30 June.
Main Views and Key Information
1. Credit Outlook and Recommendations
- Risk-off environment: The report highlights that EM credit has become more volatile due to the rise in US and EUR rates, and the firm continues to position for a risk-off episode.
- New CDS basis recommendation: A buy recommendation is added for the Turkey 5y CDS basis, which is currently undervalued. The firm does not expect a widening as sharp as in 2013 or 2015, but anticipates tighter liquidity supporting defensive trades.
- Existing recommendations: The firm continues to recommend buying South Africa and Saudi Arabia 5y CDS.
2. Last Week Performance Recap
- Average spread movement: CEEMEA sovereigns ended the week around 3bp tighter on average.
- Outperformers: Oil exporters such as Cameroon, Nigeria, Angola, Azerbaijan, and Saudi Arabia outperformed. Namibia also showed strong performance, trading flat to inside the South African curve.
- Underperformers: CEE countries, including Poland, Croatia, Romania, and Hungary, saw widening spreads. South Africa and Turkey underperformed as well.
- ETF impact: ETF-related flows were a key driver of spread movements, especially in Serbia and Namibia.
3. Turkey CDS Basis
- The Turkey $22s CDS basis is currently cheap, particularly in the front end of the curve.
- Front-end bonds appear less vulnerable to ETF outflows.
- An upcoming eurobond maturity is expected to support liquidity, though the chances of eurobond issuance have reduced.
4. CEE Sovereign Bonds
- Serbia: The $21s bonds now trade inside the $20s, indicating a potential correction.
- Hungary: Bonds remain cheap on a relative value basis, supporting the switch from Poland to Hungary.
- Poland: The firm believes Hungary may extend the EUR curve or consider another Panda bond issue if it issues a eurobond.
5. SSA Sovereign Bonds
- Namibia: Now trades flat to inside the South African curve, despite historical trends, likely due to strong economic ties with South Africa.
- Correction expected: The firm anticipates a correction in Namibia's spread relative to South Africa.
6. MENA Sovereign Bonds
- Egypt: The $5s–10s has flattened strongly recently.
7. Z-Spread Changes (as of 30 June)
| Region |
1W |
1M |
3M |
1Y |
YTD |
| CEE |
2 |
-12 |
-15 |
-107 |
-56 |
| CIS (ex-Russia) |
-6 |
-11 |
-44 |
-130 |
-45 |
| GCC |
-6 |
16 |
28 |
-61 |
-9 |
| MENA (ex-GCC) |
0 |
5 |
27 |
-124 |
-57 |
| Russia |
-8 |
11 |
25 |
-67 |
-18 |
| South Africa |
0 |
9 |
31 |
-51 |
-10 |
| SSA |
-14 |
4 |
-28 |
-257 |
-78 |
| Turkey |
1 |
1 |
-21 |
-14 |
-91 |
8. 1W Outperformers
| Country |
Z-Spread Change |
| Cameroon |
-29 |
| Namibia |
-25 |
| Nigeria |
-20 |
| Angola |
-17 |
| Ivory Coast |
-17 |
| Rwanda |
-16 |
| Azerbaijan |
-15 |
| Gabon |
-14 |
9. 1W Underperformers
| Country |
Z-Spread Change |
| Zambia |
10 |
| Lebanon |
10 |
| Poland |
5 |
| Croatia |
4 |
| Romania |
4 |
| Hungary |
3 |
| Iraq |
2 |
| Serbia |
1 |
10. Relative Value Opportunities – Russia, Turkey, South Africa
- Russia 5% '20: -14 (30/06), -10 (3m avg), -20 (3m min), 5 (3m max), 5 (1w Δ), 4 (1m Δ)
- Russia 4.5% '22: 34, 37, 15, 54, 15, 7
- Russia 4.875% '23: 53, 52, 41, 64, 9, 9
- South Africa 5.5% '20: -30, -40, -53, -11, 10, 12
- South Africa 5.875% '22: 13, 6, -6, 33, 11, 9
- South Africa 4.665% '24: 8, 11, -5, 36, 9, -3
- South Africa 5.875% '25: 14, 15, 0, 38, 7, 0
- South Africa 4.875% '26: 12, 15, -1, 42, 7, 0
- South Africa 4.3% '28: 8, 14, -4, 47, 7, 0
- Turkey 7% '20: -65, -56, -66, -38, -5, -7
- Turkey 5.625% '21: -55, -54, -63, -40, 1, -7
- Turkey 5.125% '22: -42, -42, -51, -25, 3, 3
- Turkey 6.25% '22: -33, -33, -44, -17, 5, 7
- Turkey 3.25% '23: -30, -16, -31, 4, -5, -18
- Turkey 5.75% '24: -20, -12, -25, 6, -1, -6
- Turkey 7.375% '25: -9, -9, -21, 10, 6, 2
- Turkey 4.25% '26: 0, 4, -11, 26, 5, -2
- Turkey 4.875% '26: -5, -1, -16, 22, 5, 2
- Turkey 6% '27: -11, -7, -22, 15, 6, 2
11. 5s-10s and 10s-30s Differentials
| Country |
5s-10s |
10s-30s |
| KUWIB |
24 |
40 |
| POLAND |
24 |
52 |
| KSA |
26 |
76 |
| QATAR |
26 |
81 |
| UKRAIN |
32 |
88 |
| ADGB |
33 |
94 |
| GHANA |
50 |
96 |
| CROATI |
52 |
99 |
| TURKEY |
63 |
102 |
| EGYPT |
75 |
106 |
| RUSSIA |
69 |
109 |
| SOAF |
80 |
117 |
| OMAN |
81 |
118 |
| ZAMBIN |
97 |
122 |
| BHRAIN |
107 |
122 |
12. € vs $ Comparison
- Relative spreads are adjusted into USD-equivalent spreads for comparison.
- The differential between EUR and USD bonds is provided for several countries, with figures as of 30 June close.
13. Summary of Key Points
- Turkey: The firm recommends buying the 5y CDS basis, citing its current undervaluation and support from upcoming eurobond maturity.
- CEE: Serbia's $21s bonds are trading inside the $20s, suggesting a potential correction. Hungary's bonds remain cheap, supporting the switch from Poland.
- SSA: Namibia's spread is now flat to inside the South African curve, indicating a potential correction due to strong economic ties.
- MENA: Egypt's $5s–10s has flattened strongly, reflecting market dynamics.
- Overall market sentiment: The firm anticipates a risk-off episode, with tighter liquidity supporting defensive trades.
Important Information
- The analysis is based on unweighted average Z-spread moves for fixed coupon $ sovereign eurobonds with at least 1y maturity remaining and USD 100mn notional outstanding.
- Excludes Mozambique.
- All data is as of 30 June close.
- The firm is BNP Paribas London Branch, and the report is prepared by Andrew MacFarlane, CFA. Contact details are provided for further inquiries.
