Regional Fixed Income Market Watch, August 2021
Monetary policy: National Bank of Georgia raised the key rate by 50bps to 10.0% on 4 August, citing “unexpectedly high” inflation at 11.9% in July. This is the 3rd time NBG has raised interest rates in 2021. The regulator reiterated that it will maintain contractionary policy for a protracted period of time and/or will tighten it further, if necessary. NBG also revised economic growth projection upwards to 8.5% for 2021. Armenian Central Bank raised the key rate by 50bs to 7.0% in August 2021, making it the 4th rate increase this year. Higher than expected inflationary impacts from the international commodity markets and major trading partners, increased inflationary expectations and the country’s risk premium were cited as the main reasons behind the hike. Other central banks have maintained the key rates unchanged in August.
FX market: Regional currencies traded mixed in August. Turkish Lira continued strengthening, appreciating by 1.6% to 8.32/USD by end-August. Armenian Dram depreciated by 1.55% in August, likely related to increased tensions in Nagorno-Karabakh region. Other regional currencies depreciated in the range of 0.1%-0.6% vs dollar in the same period.
Rating update: In August, 2021 Fitch Ratings revised Georgia’s sovereign credit rating outlook to Stable from Negative and affirmed at BB. Much-improved macroeconomic baseline and Fitch's confidence that the Georgian authorities will continue implementing policies supporting macroeconomic stability and medium-term sustainability of public finances were cited as the main reason for the revision. On 27th of August, S&P Ratings affirmed Georgia’s rating at ‘BB’ and maintained the Negative outlook. In August, Fitch also improved Ukraine’s sovereign credit rating outlook to Positive from Stable and affirmed at B, reflecting resilient credit fundamentals to the coronavirus shock, somewhat reduced near-term financing risks (successful Eurobond issuances, remittances and IMF special drawing rights), decreasing government debt (-3.9pp to 50% by 2021), resilient external position and improving fundamentals of banking sector. In addition, Fitch affirmed Kazakhstan and Turkey at ‘BBB’ and ‘BB-‘, respectively.
Georgia money market: In August, GEL 55mn treasury notes were sold. Weighted average interest rates on 2-year instrument declined to 8.84% on the 5 August auction, when demand reached GEL 68.9mn representing c. 3.5x oversubscription. On 26 August auction interest rate on 5-year instrument increased and reached 9.4%, with demand reaching GEL 106.5mn (3.0x oversubscription). Weighted average interest rates on shorter term instruments increased slightly in August auctions, standing at 9.385% for 6-month instrument and at 9.19% for a 1-year instrument.
Regional sovereign Eurobond market: Yields on most of the regional Eurobonds tightened in August 2021. UKRAINE 26 was the best performer of the month with the yield narrowing by 42bps, followed by TURK 26 and ARMENIA 25, with yields down by 25bps and 22bps, respectively. Yields on other regional Eurobonds tightened in the range of 5-15bps. BELARUS 27 was the worst performer, with the yield widening by 14bps in August, while yield on Uzbekistan’s 2024 Eurobond increased by 4bps in the same period.
Georgian corporate Eurobond market: In August, yields on most of the Georgian corporate Eurobonds tightened. GEOCAP 24 continued the strong performance, with the yield further tightening by 19bps in August. GRAIL 28 and BOG 23 also performed well, with the yields down by 9-9bps in the same period. From other corporate issuers, SILKNET 24 performed relatively poorly, with the yield widening by 8bps in August, 2021, while yields on other Eurobonds remained mostly unchanged.
Global markets: On its recent speech at the annual Jackson Hole forum, the Fed chairman Jerome Powell reassured global markets that the ‘tapering’ of the large-scale stimulus would be gradual. Powell also confirmed that both inflation and employment have made "substantial further progress" and are moving towards the Fed’s target. Global markets rose on the news.
Eurozone inflation jumped to a 10-year high of 3% in August 2021, up from 2.2% in July and far above the analyst expectations (2.7%). Notably, this level of inflation is also above the ECB’s target of 2%. The increase was fuelled by energy costs as well as rising food prices. Inflation in Germany, Eurozone’s largest economy, reached 3.4% in August, the highest level since 2008. The surprising rise in inflation comes days before the ECB’s scheduled 9 September meeting, where the future of monetary policy will be discussed.
Please see the full report for detailed coverage of the fixed income markets of Georgia, Armenia, Azerbaijan, Belarus, Kazakhstan, Ukraine, Russia, Turkey, Uzbekistan.