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First sign of election jitters in securities

Surprisingly high demand for short-term state security issues at the outset of 2001 is, some analysts say, a sign that pre-election market insecurity has already begun. But with Slovakia's economic image steadily improving abroad, they say, the jitters shouldn't prevent the government from placing longer-maturity issues, in foreign curreny denominated bonds such as sovereign eurobonds, at reasonable yields.
The January 9 issue of one year state bonds recorded the highest ever demand for such papers - 16.4 billion crowns ($35 million) - with just 4 billion crowns accepted. But while the Finance Ministry was obviously happy, dealers have said that the length of the bonds' maturity was key to the interest it attracted.


Traders have said that interest in short-term bonds has been affected by liquidity and next year's elections.
photo: Spectator archives

Surprisingly high demand for short-term state security issues at the outset of 2001 is, some analysts say, a sign that pre-election market insecurity has already begun. But with Slovakia's economic image steadily improving abroad, they say, the jitters shouldn't prevent the government from placing longer-maturity issues, in foreign curreny denominated bonds such as sovereign eurobonds, at reasonable yields.

The January 9 issue of one year state bonds recorded the highest ever demand for such papers - 16.4 billion crowns ($35 million) - with just 4 billion crowns accepted. But while the Finance Ministry was obviously happy, dealers have said that the length of the bonds' maturity was key to the interest it attracted.

"One of the reasons behind this huge demand was probably concerns over the [scheduled September 2002 parliamentary] election," said Martin Koska, a dealer at ING Bank. "We saw a lot of demand in these [one year] bonds from foreign investors. Part of that is because of the uncertainty over the elections. Any papers carrying more than a one year term will obviously mature after the next elections, and there is still a level of uncertainty making it difficult to predict how things will be after the elections [for investors]," he added.

Although parliamentary elections are still 18 months away, foreign investors into the Slovak bond market have already begun looking more closely at political developments in Slovakia, experts say, to gauge the risk to their investments. The signs of uncertainty perceived now are also likely to become more pronounced over the next eighteen months, traders say.

"About six months before the elections the market is likely to become what we could call 'nervous'," said Koska.

He added, though, that a lack of liquidity on longer-term issues is also fuelling demand for short-term issues.

"It is easy to put money into the shorter-term issues, because they are more easily tradeable," he said.

Importantly, the interest in the short-term securities will affect crucial longer-term papers, such as the state's planned sovereign eurobond issue.

One of last year's state financing success stories, the sovereign issue of 10-year eurobonds in March 2000 was hailed by the government, and Finance Minister Brigita Schmögnerová in particular, as a resounding pat on the back for economic reform efforts.

The bonds outstripped 1999's spring issue and saw the spread over German bunds dropping from an expected 240 basis points above German bunds to 217. The interest yield on the 1999 issue had been 4.2%.

The news was good, said the ministry. The interest was an indication of growing confidence in Slovakia and its economic policies, Schmögnerová said at the time. So far the Finance Ministry has indicated that it wants a similar issue in 2001, but has not yet given details of when exactly that will happen.

But while Slovak dealers have identified a possible shift in foreign investors' trading patterns, foreign analysts have said that the perception of Slovakia is sufficiently encouraging to outweigh any concerns over internal political stability.

"The perception among foreign investors is generally constructive," said Eric Fine of Morgan Stanley in London. "The commitment to the EU accession process is so deeply-bound now that investors believe that there is very little chance of that being de-railed," he said, adding that Slovakia had an advantage for investors in being "on the cusp" of investment grade.

"Going up to investment grade is the big one. It's a very attractive proposition for investors," he said.

Slovakia is currently rated below investment grade, but in the last quarter of last year had its outlook raised by ratings agencies Standard & Poor's and Moody's to positive. Ministers at the time said that the outlook improvement was a prelude to a raise in the actual grading some time in the first half of 2001.

This year's eurobond issue, the government hopes, will be an improvement even on 2000. And according to analysts, many of whom were surprised by the success of last year's issue, the omens so far are good enough to suggest that the government's predictions are right.

"Slovak eurobonds should continue to perform well in 2001 and a lot more investors are focusing seriously on [the issue since last year]," says Jaroslav Viťazka, portfolio manager at Schroders in London.

Bank debts to be covered

The government has embarked on a programme to cover maturing debts this year, planning to raise 78.9 billion crowns for repayment of debts, as well as having to find a further 105 billion crowns on top of this to cover costs of a 100 billion crown bank restructuring scheme which ran from late 1999 through most of 2000.

While cabinet has announced that the latter debt will be paid off using bonds through the debt agency connected with the restructuring, Slovenská konsolidačná (see story page 1), raising the cash to cover the other debts is not expected to prove difficult for the state. The government has already given notice that its attention has been refocused on the short-term bonds with a January 30 issue of state T-bonds being changed to carry a two year maturity instead of an originally planned five year.

"I really can't see any problems with it. I don't see any reasons why the government shouldn't be able to get this," added ING's Koska. "Banks have a large interest in short-term papers, and if you look at insurance and savings companies in Slovakia, they have nowhere else to put their money except into state papers."

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