Fixed Income Analysis /

Europe/CIS regional fixed income market watch – October 2021

  • To curb inflation, regional central banks continued monetary policy tightening in Oct-21

  • Turkey surprised the markets once again, with central bank cutting the interest rate by another 200bps to 16%

  • The move sent Lira tumbling further, having lost c. 30% of its value against dollar in 2021

Giorgi Iremashvili
Ana Nachkebia
Galt & Taggart
1 November 2021
Published byGalt & Taggart

Monetary policy

To curb inflation, regional central banks continued monetary policy tightening in Oct-21, with Azerbaijan, Kazakhstan and Russian central banks raising interest rates further in October, other regional central banks maintained rates unchanged, while Turkey cut the rate once again surprising the markets:

  • On 22 October, Russia’s central bank raised an interest rate for the sixth time this year, by 75bps to 7.50%. Inflation, which is “substantially above” the central bank’s forecast and is expected to remain within 7.4%-7.9% at the end of 2021, was the main reason behind the rate hike. Notably, the central bank indicated that it might raise key rate further in the coming meetings if the situation develops in line with the baseline forecast.

  • Following the rate hikes in July and September, National Bank of Kazakhstan raised the key rate by another 25bps to 9.75% in October, stating unfavourable external inflationary background as the main reason. The central bank noted that inflation in its trading partners remains elevated due to high food prices, supply chain disruptions, rising transportation costs, raw materials and energy costs along with a rebound in domestic demand.

  • Central bank of Azerbaijan raised the interest rate for the second time in a row by 50bps to 7.00% in Oct-21. The central bank doesn’t exclude further rate increases, taking into account changes in the actual and forecast inflation indicators, the balance of risks, as well as the current state of the economy and the prospects for its development in the medium term.

  • National bank of Georgia kept the key rate unchanged at 10.0% in Oct-21, for the 2nd time, after raising it by 50bps in August. The central bank said that increased inflation remains a challenge for Georgia, as consumer prices increased by 12.3% in September, and expected to remain high through Feb-22. The NBG also stressed positive developments and revised the 2021 growth projection upwards to 10.0% from 8.5%. Notably, the NBG does not rule out further rate hikes if the inflationary risks materialize in case of strong supply shocks.

  • Turkey surprised the markets once again, with central bank cutting the interest rate by another 200bps to 16% on its 21 October meeting, after cutting the rate by 100bps in September. The move sent Lira tumbling further, with the currency depreciating by 2.0% on the news, hitting all time low of TRY 9.6/USD by end Oct-21.

FX market

After the interest rate slash from Turkey’s central bank, Turkish Lira further depreciated in October. Not surprisingly, Turkish Lira is by far the worst performing currency among regional countries, which has lost c. 30% of its value against the dollar in 2021. From other regional currencies GEL depreciated slightly vs dollar, by 1.1% m/m, likely related to the pre-election uncertainty. Belarusian rouble was the best performer of the month with the currency appreciating against dollar by 3.5% m/m in Oct-21, while Russia’s rouble gained 2.5% in the same period, supported by tight monetary policy. Armenia’s dram also performed well with currency strengthening by 1.8% in Oct-21. Other regional currencies remained mostly unchanged in Oct-21.

Regional sovereign eurobond market

Increased expectations of rate hike from the Fed in 1H22 resulted in selloff in EM bonds in Oct-21, including regional Eurobonds (please note that bond yields and prices move in opposite direction). Yields on most of the regional Eurobonds increased in October 2021. BELARUS 27 was the worst performer of the month, with the yield widening by 42bps, while the price declined by 1.9% m/m. On a monthly basis, yields widened on KAZAKH 25 and TURKEY 26 up 26bps and 20bps, respectively, while prices declined by 1.2% and 0.7%. RUSSIA 23 also performed relatively poorly, with the yield increasing by 18bps m/m, while yield on GEORGIA 26 was up 16bps m/m in the same period. Yield on UKRAINE 26 increased by 12bps m/m in Oct-21. Yields on other regional Eurobonds declined, with AZERB 24 being the best performer, with yield down 16bps m/m, while the price remained mostly flat.

Georgian corporate eurobond market

Among the Georgian corporate issuers, BOG 23 and GEOCAP 24 were the best performers, with yields declining by 18bps m/m and 12bps m/m, respectively. Yield on GRAIL 28 and SILKNET 24 increased slightly, up 7bps m/m and 5bps m/m, respectively, while yields on other corporate Eurobonds remained mostly unchanged in Oct-21.

In Oct-21, TBC Bank mandated Barclays, Citi, J.P. Morgan and Renaissance Capital as Joint Bookrunners, together with TBC Capital to issue US$ 100mn perpetual additional Tier 1 notes. Fitch rated the bonds at “B-“. During the book building the demand reached US$ 200mn, with significant uptake from UK, Switzerland and Europe. After the book building, TBC Bank priced US$ 75mn, with coupon rate at 8.894% down from initial price target of 9%-9.25% (settlement on 5th of November).

Global markets

In Oct-21, the IMF released updated world economic outlook. The IMF projects the global economy to grow by 5.9% in 2021 and 4.9% in 2022, 0.1 percentage point lower for 2021 than in the Jul-21 forecast. The downward revision for 2021 reflects a downgrade for advanced economies (in part due to supply disruptions) and for low-income developing countries (largely due to worsening pandemic dynamics). This is partially offset by stronger near-term prospects among some commodity-exporting emerging markets and developing economies. Based on the IMF, rapid spread of Delta and the threat of new variants have increased uncertainty about how quickly the pandemic can be overcome and policy choices have become more difficult, with limited room to manoeuvre. According to the IMF, Georgia expected to be one of the growth leaders in the region with growth projected at 7.7% and 5.8% for 2021 and 2022, respectively.

Headline US consumer prices increased by 5.4% y/y in Sep-21, slightly above the analyst expectations. On the back of increased inflationary pressures, yields on 10-year US treasury have been increasing, reaching 1.68% by 21 October, before retreating to 1.55% by end of month. Notably, according to CME Group’s FedWatch tool, probability of rate hike in Jun-22 has reached c. 70%.