With yields at record lows thanks to the emerging market bond rally, Slovakia announced on December 14 plans to issue up to €14.5bn in debt in 2013, on top of the front loading it has completed this year.
The plan, revealed by the Slovak Debt and Liquidity Management Agency (Ardal), commits Bratislava to at least five new bond issues next year at an estimated value of €10.5bn, reports the Wall Street Journal. On top of that, the debt agency said it could also tap four existing bonds for another €4bn.
Maturities on new issues will range from five to 15 years, Ardal noted, with four on fixed coupons and another five-year issue offering a floating rate. All that said, the debt agency pointed out that the country has already started pre-funding 2013 borrowing, meaning it has the space to be adaptable.
That's a clear nod to current questions over how long the emerging market bond rally can last. Powered by liquidity action from the US Federal Reserve and the European central Bank (ECB), the hunt for yield has outpaced concern expressed last month that a bubble was developing. However, as the rash of issues from Visegrad states in the fourth quarter attest, issuers are wary that the current appetite - which has seen the yield on Slovakia's benchmark 4% 2020 euro-denominated note fall from 5.458% at the start of the year to 2.349% in November - could unwind anytime.
With that in mind, Ardal ended up issuing a total of €8.15bn in debt in 2012, according to KBC Bank, compared with its original plan to borrow €7.5bn. Analysts had forecast Slovakian bond issues in 2013 at around €6bn, and the debt agency was careful to note that the all issues in the announced plan are contingent on market conditions and investor demand.
The raised borrowing target suggests a move earlier this month by the Ministry of Finance to open discussions on adapting the constitutional debt brake by omitting the financing reserve (around €5bn currently). The law, passed late last year, applies automatic stabilizers should state debt rise above 53% of GDP. Analysts at Citigroup suggest it will reach 52.1% by the end of 2012.
Deputy Finance Minister Vazil Hudak told Bloomberg in November that the legislation is limiting the government's ability to take advantage of declining yields, and said that Ardal would probably accelerate bond buybacks to reduce state debt. "We don't plan any significant issuance in the near future," he claimed.
However, as the raised borrowing target suggests, there is a possibility of a real need for cash next year to support the budget. The government has committed to quash the deficit to below 3% of GDP, following a target of 4.6% in 2012, but is struggling to keep to a programme which analysts suggest is overly ambitious due to the slowing economy. With little space to cut spending anyway, the populist Smer administration pinned its hopes on revenue raising measures to achieve the balance, but it has spent most of 2012 admitting that the volume of cash collected through its higher taxes is lagging.
Although Slovakia is set to finish the year as the Eurozone's fastest growing economy this year, at around 2.6%, that performance is driven almost exclusively by large international investors - and carmakers in particular - which almost exclusively face the export markets. Their weight in the economy has allowed them to press for generous tax breaks, while they're unable to help too much with the country's dreadful unemployment problems, with the jobless rate close to 15% for several years.
There is therefore a clear threat that the 2013 budget targets will also be under pressure, unless the Eurozone - to which over 80% of Slovak exports head - sees a dramatic recovery. One blessing, according to WSJ, is that Slovakia's redemption profile puts the country in a relatively comfortable position in the next few years. According to KBC data, the country will have €3bn-€4bn refunding needs each year from 2013 to 2017.
However much debt Ardal manages to get away next year, its likely to be denominated in a variety of currencies once again, the debt agency said. A bid to diversify its investor base, as well as avoid the battered euro, in 2012 saw Bratislava issue bonds in Czech crowns, Swiss francs and US dollars through the year, on top of a couple of local currency issues.
Joining several CEE peers, Slovakia said in November that it plans to issue €400m (JPY41bn) in samurai bond in the first half of 2013, likely May. In the wake of two successful issues in Tokyo this year from Poland, the Czech Republic, Croatia and Latvia have also said they are mulling yen bonds as Japanese investors hunt for yield outside their traditional markets in Western Europe. The rise of Slovakia's ratings to 'A2/A/A+' puts it at a level acceptable for the Japanese market, on which it was last active in 1998.
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