April 23 (SeeNews) - Erste Group expects foreign investors’ interest in Serbian government paper issues to remain strong in the mid-run, as yields will stay attractive, the Austria-based banking group said.
The lower, but still attractive yields on domestic and international papers, accompanied by stable inflation, a more favourable fiscal performance and positive tones from rating agencies are supportive for the overall demand for Serbian Treasury bonds, Erste said in a quarterly bond market report on the countries in Central and Eastern Europe (CEE) published last week.
The Serbian debt agency is expected to keep a similar issuance pattern and continue with all activities aimed at the development of the longer end of the benchmark yield curve, Erste said. "The most interesting story will be the financing of the $1 billion (818 million euro) Eurobond maturing in the fourth quarter of 2018, as it is still not clear whether the government will try to take advantage of the favorable conditions and tap the international markets or stick to the current strategy of lowering the external part of public debt."
Eurobond issuance is planned in the 2018 budget again, but experience in the last few years shows that Serbia usually skips the issuance, despite the adopted financing plan, Erste said.
The Serbian yield of local currency bonds maturing in 2023 is expected to move towards 4.5% during the year, with upside pressure coming from benchmark yield developments, while spreads should remain relatively unchanged, the bank noted. "We expect to switch our forecasts for the benchmark yield to the newly introduced ten-year dinar-denominated bond as of our next bond report."
After the Serbian central bank, the NBS, surprised the markets by cutting the key rate to 3.00% in April, Erste expects the monetary policy tone to remain unchanged during the year, as the currently lower inflation rates are mostly a result of a high base effect and not a lack of demand. Therefore, additional support for yield developments from the monetary policy side is not foreseen. Inflation is expected to gradually accelerate in the second half of the year, when the base effect starts to fade out.
NBS said earlier this month it decided to cut its key repo rate to 3.00% from 3.25%, based on projections of slowing inflation in the coming period. The inflation rate is expected to stay at the current level for the coming months, but to gradually approach the middle of the 1.5%-4.5% target band in the next two years, NBS said.
($ = 0.817718 euro)