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Who's afraid of QE's end? Not these emerging European economies

[BRATISLAVA, Slovakia] While the prospect of the European Central Bank's withdrawal of monetary stimulus is bringing closer the end of an era of record-low borrowing costs in emerging Europe, it isn't worrying countries both inside the euro area and those just on its eastern fringe.

Governments from Slovakia to Croatia say their economies are in much better shape than when investors fled the region following the 2008 global economic crisis. Tighter fiscal policies, better credit ratings and more-diversified debt profiles mean they can handle any potential fallout from higher borrowing costs and lower demand once the ECB turns off the taps, officials at the annual Euromoney central and eastern European forum in Vienna said on Tuesday.

"Financial markets have already priced in improvements in the economy and the fiscal position," said Croatian finance minister Zdravko Maric, who predicts his country's return to investment status in two years after it was just upgraded by Fitch Ratings. "But at the end of the day, what happens in global markets is something we need to be aware of."

To get in front of any rise in borrowing costs, Macedonia has already sold 500 million euros (S$810 million) of seven-year bonds at a record-low coupon and less than Germany was paying as recently as 2011. Euro-area member Slovenia borrowed the same amount last week at a spread half a percentage point lower than a year ago.

"Taking all of this into account - how the economy will perform, how flows will go globally - I believe that spreads will remain contained," Marjan Divjak, the director general of the treasury directorate at the Slovenian Finance Ministry, said at the conference. "We don't exclude, obviously, spreads widening, even significantly, but we would be in a good position."

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Case in point: Serbia. With the help of a loan program from the International Monetary Fund, the country erased a budget deficit that reached 6.6 per cent of gross domestic product in 2014 to produce a surplus last year. In December, it received sovereign-credit upgrades from S&P Global Ratings and Fitch. Growth has also stabilised and public debt fell by almost 1.5 billion euros last year to about 63 per cent of economic output.

"Serbia has decreased its gross financing needs, so we are less exposed," Branko Drcelic, the Balkan country's director of public debt administration, said in an interview on the sidelines of the conference. "We do expect yields to rise. But on the other side, we have a better credit rating and fiscal performance."

Like its neighbour Hungary, Serbia is shifting more borrowing into its domestic currency, planning to raise the share of dinar-denominated debt to 30 per cent of the total in three years from about 23 per cent now. Even in a period of rising borrowing costs, "there will be people looking for investment opportunities," he said.

Euro member Slovakia says it's already experienced the impact of tapering, with the ECB's purchases of its bonds declining since last year. A lower-than-planned fiscal deficit in 2017 also means that funding needs have fallen and the government "is flush with cash," said Daniel Bytcanek, the director of Slovakia's debt-management agency, Ardal.

"The era of low rates will be over toward the end of the year," he said. "The additional effect shouldn't be large." Emerging markets might still prove to be vulnerable. The 2013 "taper tantrum", induced by the US Federal Reserve's suggestion of ending its unprecedented emergency measures, ripped through assets of developing nations.

For now, investors are snapping up debt at record-low yields. In the year's first emerging-nation bond sale, Slovenia saw demand reach 3.4 billion euros, and Slovakia's sale of 10- and 20-year bonds Monday attracted bids of about 1 billion euros, more than five times the amount raised. Macedonia got 2.4 billion euros in offers for its issue.

The yield on Macedonia's euro-denominated bond maturing in 2025 fell 12 basis points to 2.5 per cent on Tuesday. Slovenia's 2028 securities rose, sending the yield down three basis points to just over 1 per cent.

"We caught the right moment and we're glad that demand from international investors was huge," Macedonian finance minister Dragan Tevdovski said in Vienna. "We significantly reduced the risk for refinancing in the future."


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