Monetary policy: Inflation accelerated across the region in 2021 and most of regional central banks continued monetary policy tightening in Sept-21. One of the drivers of price growth is rapid increase in global food prices, which are now near their highest level in a decade – FAO Food Price Index increased by 40% between May-20 and Aug-21. To curb the increasing inflationary pressures, 5 regional central banks raised interest rates in September, 3 maintained rate unchanged, while Turkey cut the rate:

  • National Bank of Ukraine increased the key rate by 50bps to 8.50% (4th time in a year).  Notably, inflation has been exceeding 10% in the last several months, influenced by both temporary and fundamental factors. The central bank expects inflation to slow at the end of 2021 and return to target 5% from 2022. 
  • Russia’s central bank raised interest rates for the fifth time in a row on 10th of September, bringing the key rate to 6.75% (up from 6.50%). The rate hike came ahead of the parliamentary elections in Russia (held 17-19 Sep), where Russian President Vladimir Putin’s party won, with nearly 50% of the vote. Notably, the central bank indicated that it might raise key rates further in the coming meetings to curb inflation. 
  • National Bank of Kazakhstan raised the key rate by 25bps to 9.5% in September, making it the second interest-rate hike in a row. This came two weeks after the president of the country ordered the policy makers to get inflation under control. 
  • Armenian central bank raised the key rate by 25bs to 7.25% in September – 5th increase of the year. High inflationary pressures from external sector was named as the main reason for the hike.
  • Central bank of Azerbaijan raised the interest rates for the first time in 2021, bringing the rate to 6.50% up from 6.25%. Intensification of inflationary pressure in the global economy, especially the transfer of rising food and raw material prices, transport and logistics costs was cited as the main reasons behind the rate hike. 
  • National bank of Georgia kept the key rate unchanged at 10.0% in September 2021, after raising it by 50bps in August (cumulatively raisig rate by 200bps in 2021). Inflation remains high (12.8% in August), but the NBG highlighted that “the driving forces of high inflation are still predominately one-off and independent from monetary policy”. The NBG expects a significant reduction in inflation starting from spring 2022. (Uzbekistan and Belarus central banks also kept rates unchanged in September).
  • Turkey surprised the markets once again, with central bank cutting the interest rates by 100bps to 18% on its 23 September meeting. The move by the central bank sent Lira tumbling, depreciating by 1.5% following the decision, hitting all time high of TRY 8.9/USD by end Sep-21.

FX market: Not surprisingly, Turkish Lira was the worst performing currency of the month, depreciating by 7.3% m/m against dollar. From other regional currencies Ukraine’s Hryvnia performed strongly, appreciating by 1.3% m/m against USD, supported by ‘benign external environment for Ukrainian exporters and the central bank’s prudent monetary policy’. After the 5th interest hike from the central bank, Armenia’s Dram also strengthened, up 1.4% m/m in September. Russia’s rouble also performed well, strengthening by 0.5% m/m to strongest level since Jun-21. GEL and other regional currencies remained mostly flat in September.

Georgia money market: In September, GEL 55mn treasury notes were sold with 5 year maturity. Weighted average interest rates stood at 9.33%. Demand was strong, with 3.0 oversubscription. Weighted average interest rates on shorter term instruments increased, standing at 9.48% for 6-month instrument and at 9.24% for a 1-year instrument. Notably, in Aug-21 non-residents’ treasury holdings dropped by 16% m/m bringing down its share in total outstanding holdings from 13% in Jul-21 to 10.9% in Aug-21. 

Regional sovereign Eurobond market: The strong signal from the Fed to start ‘tapering’ as soon as November 2021, resulted in selloff in EM bonds, including regional Eurobonds (please note that bond yields and prices move in opposite direction). Yields on most of the regional Eurobonds increased in September 2021. TURKEY 26 and UKRAINE 26 were the worst performers of the month, with the prices dropping by 1.8% and 1.1%, respectively (yields widened by 84bps and 41bps). Followed by AZERB 24, UZBEK 24, GEORGIA 26 and KAZAKH 25, with prices dropping by 0.7%. BELARUS 27 was the only regional Eurobond trading in green, with prices increasing by 1.8% m/m. 
On 13 September 2021 Turkey successfully issued US$ 2.25bn bond offering – US$ 750mn tap of its outstanding 6.125% notes due October 2028 and a US$ 1.5bn 6.500% new 12-year issuance. This is the 4th issuance by the country in 2021 (a total of US$ 10bn). The transaction attracted more than US$ 9.0bn demand, resulting in tightening of the initial price thoughts. 

Georgian corporate Eurobond market: Among the Georgian corporate issuers, SILKNET 24 and TBC 24 were the worst performers in September, with prices dropping by 1.8% and 1.1%, while yields widened by 24bps and 13bps, respectively. Despite the slight decline in price in September, in our latest report we outline that the Eurobond call is highly likely in April 2022. GEOCAP 24 was the only Georgian Eurobond trading in green in September, with price increasing by 1.8%. This represents about 40bps tightening compared to the sovereign. Prices on other corporate Eurobonds also declined in September, in line with the wider markets. 

Global markets: The Fed conducted its two-day policy meeting on 21-22 September. Policymakers strongly hinted that they would consider ‘tapering’ or withdrawal of the central bank’s purchases of Treasuries and mortgage-backed securities as soon as November 2021. 

What does tapering mean for the Emerging Markets? In response to the COVID-19 pandemic the Fed started expansionary monetary policy (slashing interest rates to 0%) and quantitative easing (buying US$ 120bn treasuries and mortgage-backed securities), similar to the quantitative easing program in the aftermath of the 2008 global financial crisis. Any decision to slow down the pace of bond buying will have an impact on the emerging markets. Just like the 2013 “taper tantrum” (when investors dumped EM financial assets, several Asian and Latin American EMs experienced sharp reversals in capital inflows, resulting in currency depreciation), investors are likely to pull out money from riskier EM economies to less risky ‘safe heaven’ assets once Fed starts to move to a tighter monetary policy. This will likely have negative effect on regional Eurobond and FX markets. 

Eurozone – The European Central Bank announced on its meeting on 9 September, about moving to “a moderately lower pace of net asset purchases” as Europe’s economy recovers. Norway became the first G10 country to tighten monetary policy. On 23 September, Norway’s central bank announced about 25bps increase in its short-term interest rates from 0% to 0.25%. Norges Bank Governor said there would probably be another rate increase in December.

Please see the full report for detailed coverage of the fixed income markets of Georgia, Armenia, Azerbaijan, Belarus, Kazakhstan, Ukraine, Russia, Turkey, Uzbekistan.