Romanian 30-year bond sale reflects improving fundamentals

By bne IntelliNews January 16, 2014

Nicholas Watson in Prague -

Romania issued a total of $2bn of 10-year and 30-year dollar bonds on January 14 at yields of 5.02% and 6.26% respectively, giving the sovereign the longest tenor of dollar-debt in the Southeast Europe region. Analysts says prudent fiscal management, improved macroeconomic balances, progress with structural reforms, the continued presence of the International Monetary Fund and a reduction in political risks should continue to support the credit this year.

"We think the results stand out as positive, with a negative liquidity premium for the 10-year Eurobond (yield some 14bp below CDS and mid-swaps), improving on the -10bp premium for a similar issue a year ago, while only marginally positive (+17bp) for the longer-dated paper," writes Mihai Tantaru, economist with ING Bank Romania.

With Romania's total financing needs for 2014 at €12.3bn and no international bonds maturing this year, the issuance of the two tranches meets virtually all of the government needs on the international market for this year," writes RBS analyst Abbas Ameli-Renani. "There is just €0.5bn [of international borrowing] left for the rest of 2014. We expect the government to avoid coming back to the international market until Q4, at which point it would want to start pre-financing for 2015. The continued welcoming mood of the market may however induce an earlier return by the treasury."

Romania's economic fundamentals look increasingly strong. Tight control over spending translated into a 2013 budget deficit likely to come in at 2.5% or under, and a further reduction is forecast in 2014. The current account deficit tightened from 4.4% in 2012 to likely below 1.3% in 2013, while public debt is stable at around 38% of GDP. "We've heard from government authorities that 2013 growth may have been as high as 3% - considerably above our forecast of 2.5% and the government's 2.2% official expectation," writes Ameli-Renani.

Political risk

This being Romania however, political risk is never far away. The danger has taken a step back since the 2012 bust up between President Traina Basescu and Prime Minister Viktor Ponta's Social-Liberal Union (USL) coalition, but analysts say some concern remains.

The 2012 bout paralyzed government, put the country on a collision course with the EU, and threatened the fragile economic recovery. It only ended after the nine-member Constitutional Court ruled that a referendum to impeach Basescu, called after Ponta managed to get parliament to suspend the president, was invalid because the turnout fell short of the required 50% of the 18.3m electorate. In the referendum, 88% of those who voted wanted Basescu out. However, the turnout was only 46%, in no small part because Basescu had called for a boycott of the vote.

"[We are] wary of possible tensions between PM Ponta and President Basescu, and/or between the PM and his coalition partner and deputy, [Crin] Antonescu," remarks Ameli-Renani. "The potential for the latter, in particular, has been more important in our view as it could have threatened a break-up of the ruling USL coalition, which is formed of PM Ponta's Socialists and Deputy PM Antonescu's Liberals. That risk has now receded in our view with announcements earlier this week that Antonescu will be nominated by USL for the presidential elections in November and that he will be supported by PM Ponta."

As well as the presidential elections, the USL is driving a constitutional referendum, scheduled to be held alongside the vote for the European Parliament in May. It is still not clear exactly what constitutional changes will be proposed, but they are likely to include provisions on the responsibilities of the president and the number of MPs.

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