Croatia delays Eurobond issue due to political uncertainties

Croatia delays Eurobond issue due to political uncertainties
By Akin Nazli in Belgrade June 2, 2016

The Croatian finance ministry announced in a written statement on June 1 that it has decided to issue the only Eurobond planned for this year after the current domestic political uncertainties are settled. The ministry said it will continue to monitor the trends in international financial markets before launching the issue.

A sovereign Eurobond issue was previously believed to be imminent. A delegation from the finance ministry and the Croatian National Bank (HNB) held investor meetings in Germany and London on May 30 and May 31 to issue 10-year Eurobonds.

However, the political situation in Croatia is highly uncertain at present. A vote of confidence in Deputy Prime Minister Tomislav Karamarko is due to take place on or before June 18, and members of the Bridge of Independent Lists (Most) - the coalition partner of Karamarko's Croatian Democratic Union (HDZ) - have already indicated they may vote against the government.

Finance Minister Zdravko Maric said on March 9 that the government planned to borrow from both domestic and international markets in order to cover the planned budget deficit. Reuters reported on May 25 that Croatia has mandated Citigroup, HSBC, Morgan Stanley and UniCredit to arrange fixed-income investor meetings starting from May 30 for a possible euro-denominated debt issue.

Raiffeisen Research questioned the government's latest move in a June 2 analyst note, saying that it was "a bit skeptical that Croatia can achieve a better pricing with such a wait-and-see stance."

"Up to now markets were very ready to receive this year but market conditions may become even more challenging in the weeks/month(s) ahead," according to Raiffeisen. "The postponement could be also seen as a certain sign of (fundamental) credit weakness," analysts added, noting that sovereign credit updates by all three major rating agencies are looming in July (with negative outlooks across the board).

Tim Ash from Nomura Securities commented on June 1 in an e-mailed note that the timing of the latest "political shenanigans" in Croatia obviously came "at an inopportune time" as the country roadshowed for a new 10-year euro-denominated Eurobond, and as the government is "still eager to sew up refinancing for the troubled state owned highways entity. But recent widening in Croatian spreads should still prove enticing enough to ensure deal success, given now that Croatia trades wide to its Eastern European peers," according to Ash.

Amid ongoing political uncertainties over the approaching confidence vote, macroeconomic indicators continue to perform well in Croatia. GDP growth accelerated to 2.7% y/y in Q1 from 1.9% y/y in the last quarter of 2015, the first estimate from the statistics office showed on May 31. Q1 growth exceeded the 2.4% y/y expectation of analysts surveyed by Reuters.

So far this year, Croatian finance ministry has sold a combined HRK8.97bn worth of kuna T-bills and €32mn worth of euro-denominated securities on the domestic market.

The finance ministry issued on March 16 the second tranche of 10-year bonds maturing in 2026 and raised a total of HRK4bn on the domestic market at a cost of 3.99% against demand of over HRK10bn, more than 2.5 times higher than offered.

Croatia’s consumer prices have been on a downward trend since the end of 2014 and deflation is likely to continue due to the steady decline in global oil prices. They fell 1.7% y/y in April after they showed the same annual decline the previous month, the statistics office said on May 16. However, the Croatian government expects consumer prices to resume growth this year and forecasts annual inflation of 0.1%, according to the 2016 budget adopted by the parliament on March 21.

Croatia, which entered the European Commission’s excessive deficit procedure (EDP) in January 2014, has been trying to reduce its deficit for the past two years.

As domestic risks that can undermine Croatia’s fragile recovery, high government and private debt, jointly representing more than 200% of GDP in 2014, will continue to constrain public and private investment and household consumption, said the World Bank in its Europe and Central Asia economic update. It added that debt sustainability analysis indicates high risks in the medium term, while the scope of fiscal consolidation measures for 2016 and 2017 is still uncertain. The World Bank forecasts Croatia’s government debt to GDP ratio will increase to 88.8% this year from an estimated 87.8% in 2015.

Moody’s announced on March 11 that it had downgraded Croatia's long-term issuer and senior unsecured debt ratings to Ba2 from Ba1 and maintained the negative outlook due to the large and increasing government debt burden, and weak medium-term growth prospects. Now, all three rating agencies, Moody’s, Fitch and Standard & Poor's, rate Croatia at two notches below investment grade with negative outlooks.