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This week's highlights were India's Budget announcement that it
plans to sell sovereign bonds internationally, Germany's initial
move towards Green/Social bond issuance, positive focus on Italy,
which successfully sold 50-year debt, and greater market concerns
regarding Turkey and Mexico after the presidential removal of the
former's central bank Governor and the resignation of Mexico's
Finance Minister over policy disagreements.
Emerging markets
Indian Finance Minister Nirmala Sitharaman stated in the 5 July
Budget that India would seek to undertake international borrowings
to help fund its budget deficit and benefit from strong prevailing
demand. She stated that "India's sovereign external debt to GDP is
among the lowest globally at less than 5%", and that the government
"would start raising a part" of its program in foreign
currencies.
Economic Affairs Secretary Subhash Garg subsequently suggested
this was unlikely to exceed "10-15% of the total borrowing, which
makes it roughly USD10 billion". Further details potentially will
be released in September.
Turkey's Central Bank governor Murat Cetinkaya was dismissed
unexpectedly on Saturday 6 July by presidential decree. He was
replaced by Murat Uysal, a central bank deputy governor previously
at Halkbank, a state-run bank. Turkey's EMBI+ index worsened from
458 to 480 basis points over US Treasuries on the news.
Tunisia launched a seven-year Euro-denominated benchmark deal
with initial guidance of 6.875%. It went on to sell EUR700 million
at 6.375% (roughly the maximum USD800 million authorized) with
demand reaching EUR2.2 billion from 182 investors. Last October it
placed EUR500 million of five-year debt at 6.75%.
Romania has raised a further EUR2 billion from the international
markets, placing EUR1.4 billion of 12-year debt and tapping its
30-year outstanding bond with an additional EUR600 million. Ziarul
Financiar website flags that this takes total international
borrowings in 2019 to EUR5 billion, versus an initial target of
some EUR4.25 billion.
Two Mexican issues will test market appetite after the sudden
resignation of its Finance Minister Carlos Urzua, citing policy
differences with the AMLO administration, with a Twitter statement
that some policy decisions lacked "sufficient foundation". The move
triggered an initial fall of 2.25% in the Peso versus the US
dollar. Real estate investment trust Terrafina is meeting investors
this week, seeking international debt to fund the repurchase of
existing 2022 liabilities and fund expansion. Leasing company
Docuformas is also planning issuance to refinance existing 2022
debt.
Italy and Germany
Italy has been in positive focus after it avoided the European
Union starting an Excessive Deficit Procedure. In the week to 5
July, its 10-year bond yield declined 35 basis points to 1.73%,
trading as low as 1.585 on 3 July.
In response, Italy returned to the market with its second
syndicated deal in a month. On 9 July, it gained some EUR17.5
billion in demand for a EUR3 billion tap of its 50-year 2.8 2067
bond, at 2.877%, pricing 11 basis points over its 3.85% 2049 BTP.
Italy's Treasury has announced that some 200 investors were
involved.
During 8 July, Italy's Unicredit completed an accelerated
book-building for its remaining 18.3% stake in FinecoBank. It
placed 111.6 million shares at EUR9.85 each, a 4.4% discount to the
prior closing price, to raise EUR1.1 billion.
Also, from Italy, Mediobanco gained over EUR1.35 billion of
demand for a EUR500 million six-year preferred senior issue. The
deal was described as tightly priced, coming through theoretical
fair value.
A Financial Times report claims that Germany is considering
Green Bond issuance in 2020. It reported on 9 July that the Finance
Ministry currently is reviewing such options and cited a German
Finance ministry statement that "this process must be conducted
with utmost scrutiny and discretion".
The Ministry's own website notes that its Sustainable Finance
Committee held a constitutive meeting on 6 June 2019, setting
itself "an extensive work program which will be further developed
on an ongoing basis". However, "the details are still being
coordinated".
Our take
Overall India has sizeable borrowing needs - 3.3% of GDP in the
budget projection - and a sizeable public-sector debt stock of
69.8% of GDP. However, it has no international bond debt
outstanding whatsoever. This ensures high focus on its planned
sale, which is likely to attract very strong demand on rarity
grounds.
One other benefit cited by Indian media is that sovereign debt
sales could provide clearer and tighter benchmarks for Indian
corporate and financial sector issues.
IHS Markit views the renewed interference in Turkish central
bank policy as risking hurting sentiment materially over time.
Despite the initial jump in Turkish bond yields, the market's move
so far has done no more than take Turkey's EMBI+ index back to the
levels prevailing in late June. It is unclear whether the modest
dislocation reflects intervention in bond markets: in the currency
market Turkey reportedly spent GBP1.4 billion equivalent of its
reserves on 8 July after facing a 3% fall in the Lira.
Turkey's next MPC meeting on 25 July thus will provide important
indicators of its stance. This had been expected to cut rates to
reflect recent improvements in the inflation rate, but a sizeable
cut would suggest potential political interference. Another
important indicator will be whether the US imposes sanctions on
Turkey for its purchase of Russian air defense systems.
Conversely, indicators for Italy are clearly positive. Its
further long-dated bond sale was successful, reflecting current
investor use of long-duration instruments to improve returns.
Unicredit's share sale strengthens the capital position of one of
Italy's largest banks, with the discount required looking modest.
Mediobanca's deal also was healthily oversubscribed. For the time
being, sentiment towards Italy thus has improved. However, Italy's
fiscal position remains exposed to economic slowdown, and it would
seem premature to rule out the risk of market dislocations at a
later stage.
Germany is an obvious candidate for Green Bond issuance.
However, it appears at an early stage of preparation, and issuance
would not be until 2020 (or later).
Posted 12 July 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit