Too good to let go

This report reaches you at a time when Emerging Europe and Turkey could be stuck on the tarmac. The political situation means Ukraine is grounded and Russia may yet have to consider an emergency landing, yet the rest of the CEE region appears to be about to take off. Placing regional politics to one side, the capital markets have begun the ascent as the clouds part to reveal an increasingly bright economic outlook. The technical imbalance between supply and demand is giving issuers huge pricing power, with recent deals from Latvia and Romania both priced at tight levels. Even Turkey, battered by stormy headlines, has had no problems funding itself, with its deals in dollars and euros all receiving a tremendous reception. Now the country’s banks are beginning to access the capital markets as pricing becomes more attractive. So, while political risk has been the dominant theme in region this year, investors continue to play. In some instances, money is being recycled from the riskiest markets, politically speaking, to less risky. Even Turkey is benefiting from money flowing out of Russia. Conditions are improving. After struggling to emerge from the deleveraging trap following the financial crisis, the region ex-Russia and Turkey is expected to grow by 2.3% this year, according to the IMF. That may seem small compared with some other emerging economies, but it’s still almost twice that of last year. Investors should remain wary, however. As the IMF said in its spring Regional Economic Issues Report: “An unusual constellation of risks clouds the outlook.” And it wasn’t just referring to the geopolitical tensions in Ukraine. The gradual unwinding of monetary stimulus in the US and potential deflationary risks in the eurozone pose problems too. Moreover, not every economy in the region is flying on an even keel and some could face turbulence. Croatia, for example, is still struggling to escape from recession; Serbia’s incoming administration needs to agree an IMF programme; and in Slovenia, the prime minister lost a party leadership election. As ever there will be winners and losers. A look at three stock exchanges – Warsaw, Bucharest and Vienna – shows a remarkable shift as the man with the Midas touch, Ludwik Sobolewski, is reforming the Bucharest Stock Exchange, while Warsaw’s loses its grip. Even within Austria, with its punctilious loyalty to nations east of Vienna and west of Moscow, there is no one-size-fits-all strategy, as evidenced by Erste Bank’s Ukrainian exit and Hungarian concerns; and by Raiffeisen’s determination to squeeze every drop of profit out of a half-dozen strategic markets. Growth has picked up faster in CEE than in the eurozone, and the average debt-to-GDP ratio stood at 55% at end-2013, against 93% for the eurozone. “In the long term, [CEE] will be the region with the best growth prospects in Europe,” said Austria’s central bank in its January 2014 outlook, noting that operations across the eastern half of Europe would generate higher profits for Austrian lenders than purely domestic operations. But keep the parachute handy, as loan volumes have yet to catch up with the region’s revival. Total profit generated by Austrian lenders across the region in the first half of 2013 was €1.4bn, flat to the previous year, according to National Bank of Austria data. Moreover, the bulk of earnings were sourced in just two markets, Russia and the Czech Republic. A number of countries remain vulnerable to external shocks because of their relatively high stock of external debt. Further structural reform remains of paramount importance. To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.

To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. The CEE high-yield market is gaining momentum as banks scale back their balance sheets, forcing companies to look elsewhere for cash. The phenomenon is well under way in the West, but has been steadily spreading east. In 2012, the CEE region, excluding Russia and Turkey, saw US$4.3bn in issuance. That figure more than doubled to US$8.7bn in 2013, implying that high-yield issuance grew considerably faster than DCM issuance. Although this was skewed by a number of very large deals, such as Play’s €900m debut bond deal in January, it is still an encouraging trend for the market. Polish TV broadcaster TVN was credited with kicking off a flurry of high-yield deals in the region in September when it issued €430m of bonds to refinance existing debt. The deal was priced at 7.378%, its lowest coupon ever, an indication of things to come in later months. Play was one of the stand-out deals of the past 12 months in terms of size and the excitement generated among investors. A strong growth story, the Polish telecoms company has established an 18% market share, despite only entering the market in 2007. The bond issue was split into €630m of senior secured debt, rated B1/B+/B+, with five-year euro and zloty tranches, and a €240m 5.5-year non-call 2.5 senior unsecured tranche, rated B2/B–/B–. The senior euro tranche was priced at 5.25%, with the unsecured euro tranche at 6.5%, while the senior zloty tranche, a mere Z130m (€30m), was priced a little wider at 350bp. However, the smaller economies in the region are increasingly turning to the capital markets as well. RCS & RDS, the Romanian and Hungarian cable group, issued a €450m seven-year non-call three senior secured bond offering in October that experienced incredible demand, allowing it to be both accelerated and upsized by €100m, and being priced to yield 7.5%. In Bulgaria, Vivacom’s €400m five-year non-call two senior secured issue was priced at 6.625% in November, the same month in which SBB-Telemach, or Serbia Broadband, issued its own deal backing an acquisition by KKR. It priced a €475m senior secured bond issue at 7.785%, despite concerns about a loose covenant package. Evidently, investors did not take too much persuading to consider deals on the other side of the former Iron Curtain. The development of the high-yield market in CEE promises to make financing available for companies for which the bank market has become a much harder sell. Under new owners and having gone through a restructuring, Vivacom had reached its limits in the bank market but was looking for a capital injection to give it breathing space for the next five or six years without necessarily making any covenant adjustments, said Tanneguy de Carne, head of high-yield at SG. The bond market provided this where it is unlikely the bank market would have, he said. The growing influence of the high-yield market owes much to the technology, media and telecommunications sector, from which all the examples cited so far are taken. It is the same sector that nurtured the growth of high-yield in the US. TMT has always been the stronghold for the high-yield market and still provides a large number of deals coming through the pipeline globally. But this is especially true in CEE.  It is easier for investors to make investments outside their geographical comfort zone if they are in sectors with which they are intimately familiar. Evidence can be found in CEE TMT names currently trading on Nasdaq. A TMT credit in Germany is broadly comparable to one in Romania or Bulgaria, said De Carne. Widening the scope But as CEE matures, the high-yield market should attract more names from other sectors. “This is already starting to happen, we have seen deals from other sectors like health and services,” said De Carne. “We need to see more deals from energy, capital goods a

To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. When Marcus Svedberg used to visit Warsaw, he would always swing by the Treasury to discuss the latest round of sales of state-run assets. But on his latest trip to the Polish capital, in March 2014, chief economist at East Capital decided to re-jig his schedule. Poland is in the midst of a mini-economic revolution. May 1 marks the 10th year of its accession to the EU, and the advances that the largest economy in CEE have made can be seen clearly in the legacy of the nation’s highly successful privatisation programme.  Since the turn of the century, the Polish government has raised US$24.9bn by shedding state assets, according to Dealogic, though earnings have slipped in recent years. The state earned US$7.6bn from asset sales in 2007, at the apogee of the privatisation process; by 2013 that number had declined to US$3.1bn. The number of sales has also fallen sharply. Between 2009 and 2011, the government divested 760 state-run assets out of a target of 802. In 2012 and 2013 combined, that number fell to just 240, from a target of 300. Paweł Tamborski, Under-Secretary of State at the Ministry of Treasury, admits that the fervour to sell state assets has waned in recent years. “Our current plan is to privatise 250 companies this year, the majority of which are rather smaller companies when compared with previous privatisation programmes”, with the aim of raising around US$1bn, said Tamborski. One-third of the total will come from the sale of small and medium-sized companies to Polish entrepreneurs, the larger of which, he added, might appeal to foreign investors. The remainder will comprise secondary sales, mainly accelerated bookbuilds – Tamborski admits there are no obvious candidates for initial public offerings in this year’s crop of assets. Poland finds itself in a strange place. Its capital markets have developed apace over the past decade, precisely because the Treasury has aggressively promoted the sale of public assets, many of which were listed on the Warsaw Stock Exchange (GPW). The development of Polish capital markets and encouraging issuance from the private sector has been high on the Treasury’s agenda. Svedberg said Poland was one of the few capital markets in emerging Europe with genuinely powerful domestic mutual and pension funds that are also leading players on the GPW, “so it is less dependent on external funds”. But in December 2013 that all changed, when the Polish parliament passed a bill requiring open pension funds (OFEs) to transfer 51.5% of their assets, mainly Treasury bonds and Treasury bills, to the state’s Social Security Institution. In a report in February titled “How the Polish pension fund reform will affect the fund’s investments” law firm Allen & Overy said: “OFEs with less money to spend mean that issuers looking for capital on the market may face more difficulties selling their securities at a satisfactory price or selling them all, which may in turn shift their attention to foreign investors with potentially deeper pockets.” Vanity exercise This creates a serious headache for the Polish Treasury. Tamborski has tried to dismiss the importance of the move to nationalise the majority of Poland’s private fund managers, saying it was little more than a vanity exercise, designed to trim the ratio of debt-to-economic output below the 50% mark. Tamborski may or may not believe his own words when he said privatisations had become “less important from a budget revenue perspective and in terms of transformation of the Polish economy”. But the government’s actions will also more than likely cut the knees off the nation’s once-vibrant securities market. “I do not expect that private issuance will immediately replace privatisations dollar for dollar,” said Karol Poltorak, director of Poland equity capital markets at Citigroup, though he

To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. “If you visit, it doesn’t feel like an economy in free-fall,” said Marcus Svedberg, chief economist at East Capital. It is a comment that strikes at the heart of the former member of the Yugoslav Republic. The first to break away from the Communist state, Slovenia then spent the 1990s successfully reinventing itself as the Austria on the other side of the Alps. Its capital Ljubljana has always felt distinctly European, and euro entry in 2007 was a foregone conclusion thanks to the fastest growth in the eurozone. But that is when the rot set in. The global debt crisis shone an unwelcome light on crony capitalism and the wild spending of its state-owned banks. Slovenia narrowly managed to avoid metamorphosing into a second Cyprus late last year. Thanks to the Herculean efforts of Prime Minister Alenka Bratusek, the country was able to avoid the stigma of a Troika bailout. In December, the country pumped in €3.3bn of government funds to save its lenders. But a huge amount of work still needs to be done. Thanks to the bailout of its own banks, the country’s debt rocketed to 71.7% of GDP at the end of last year, according to Eurostat, up from 23% in 2008. The government intends to cut the budget deficit from an eye-watering 14.7% of GDP down to 4.2% of GDP this year. And while the subject of non-performing loans is a familiar one in Central Europe, in Slovenia they stand at a hefty €11bn. That is almost a third of the annual national output. Little wonder that Bostjan Jazbec, governor of the central bank, has described the problem in several recent interviews as “worrisome”. It is true that there have been some improvements. In mid-March the Bank of Slovenia said that arrears of more than 90 days had fallen from 17.4% at the end of Q3 last year to 13.4% at the end of Q4. While a step in the right direction, the figures are something of a mirage. Fitch pointed out that Slovenian banks’ asset quality was still a risk despite the transfer of non-performing loans to a government-created “bad bank”. “Impaired loans have not reduced substantially as stricter loan classification has led to new inflows, even though official NPLs have fallen,” it noted. Privatisation issues A front-line weapon in the government’s armoury to reduce debt is privatisation. The calls for privatisation might have been rapid, but work has been slow. Half the economy still remains in state hands. So far, only two of the 15 state-controlled companies that had been earmarked for privatisation have been sold. A huge step was taken at the beginning of April with the announcement of the 75.6% sale of national telecoms Telekom Slovenije, the jewel in the country’s privatisation crown. A few weeks later, the sale of the country’s second-largest bank Nova KBM was also announced. All of this is difficult, and yet Slovenia receives little other than positive sentiment. The sovereign has had few problems raising money in the international markets. Despite €24bn of debt outstanding, with almost a third due by 2016, Slovenia has already comfortably covered its needs for this year and has stolen a march on next year too. In mid-February, it raised US$3.5bn through a dual-tranche offering of new five and 10-year notes. Admittedly, the initial premium was a generous 25bp–37.5bp, but the order book still reached a whopping US$18.5bn at its peak, and even when scaled back, books topped US$16bn. The US$1.5bn five-year was priced at US Treasuries plus 280bp while the US$2bn 10-year went at Treasuries plus 280bp. This was followed in early April by the sale of €2bn of notes, split equally between three-year and seven-year tranches. The fact that the debt is denominated in euros was deliberate – a sign that the country is pulling away from emerging market rivals and back into the eurozone fold. Even though the premium was s

To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. Thanks to its debt problems throughout the sovereign debt crisis, Hungary has been what Benoit Anne, head of emerging markets strategy at Societe Generale, called the “poster child of contagion”. But as he points out, that theme is three years old and it might be time to start thinking of the Central European country in a rather different way.  Let’s face it, the economic news is not too shabby. After a dire fall of 1.7% in GDP in 2012, Hungary moved out of recession in Q2 last year and posted growth of 2.7% in Q4. Even if that figure is slightly distorted by the public investment that came courtesy of EU structural cohesion fund transfers of US$6.7bn last year, growth in Q1 this year was still 2.1% and economists are predicting growth figures for all 2014 of about 2.2%.  The country’s debt-to-GDP figures have started to improve too, albeit slightly. From Q3 to Q4 last year the figure declined from 80.3% to 79.2%, according to Eurostat. Inflation has fallen sharply from the high levels of 2012 and is expected to stay below 3% this year. Unemployment is below the EU average at 8.6% and the forint has been resilient.  Love to hate This is all a long way from the US$25bn emergency credit line Hungary needed from the EU, IMF and World Bank in 2008, so why the perennial gloom? Part of the bad reputation of Hungary comes from its politics. “Hungary is the one country in Central Europe that people like to dislike because of politics,” said Marcus Svedberg, chief economist at East Capital.  At the beginning of April, incumbent Prime Minister Viktor Orban and his right-wing Fidesz party comfortably won the elections. There has been much carping from the opposition and the elections were considered free but criticised as not being fair. It is worth emphasising that Fidesz won on a landslide; taking 133 of the 199 seats.  As one economist said: “The problem is that Fidesz is popular. The previous socialist government was a disaster, but Fidesz is competent. The population might be annoyed by the party’s undemocratic drive, but there is no alternative.” That is the nub of it. European commentators are vexed that Hungarians endorsed Orban’s blatant nationalism and state-centred politics. In a grandstanding speech just after the election and in front of thousands of supporters in Budapest this was put on display. Orban said he saw his job of the next four years as to protect Hungarians from “profiteers, monopolies, cartels and imperial bureaucrats” – an explicit dig at Brussels.  Achille’s heel This has impacted on key aspects of Hungarian life. Last year, the domestic gas distribution business of German utility company E.ON was renationalised and given to the state-owned Hungarian Electricity Works. The prime minister has signalled his intention to increase Hungarian ownership of the banking system to 50%, made possible through a national buyout of foreign-owned banks that have suffered thanks to high taxes and non-performing loans. At 17%, according to S&P, NPLs are a distinct economic Achille’s heel.  Nationalism is not just apparent at a corporate level;it is obvious at a street level too. The nationalisation of the country’s tobacco kiosks in the spring last year, for example, has had the side-effect that the word ”Nemzeti” or “National” is emblazoned on every street corner. There was a distinctly authoritarian flavour to Orban’s first term in office. Aside from a media clampdown, the government has also rewritten the country’s constitution, changed electoral rules and moved election boundaries in its favour. And with to two new nuclear generators in the central Hungarian town of Paks, which have been financed with a US$13.8bn loan from Russia, the prime minister’s eyes are increasingly turning to Moscow. It is notable that Hungary has not supported opposition or sanctio

To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. Alisa Maric embodies the intimate relationship that exists in the Balkans between economics, politics – and chess. An economist by training, the former Serbian sports minister and one of the country’s most popular celebrities is also a woman grandmaster – the world’s highest-ranking chess title restricted to her gender. Any observer will tell you that in this part of the world outcomes in both economics and politics are determined like moves in a chess game – and when the pieces are positioned correctly, the result is assured. For Serbia and its otherwise troubled economy – like a chess stratagem that was failing badly – those pieces may just have fallen into place. A landslide victory for the ruling party in the March elections has provided an iron-clad mandate for sweeping economic reforms just as the country begins negotiations to join the EU that are likely to ensure that its government makes exactly the right moves. “This really is an opportunity for Serbia to push ahead because until now, ruling coalitions have typically been more fragmented and have not had the same level of power that this government will have,” said Peter Sanfey, deputy director for country strategy and policy at the European Bank for Reconstruction and Development and a specialist on South-Eastern Europe.  “The EU accession process is going to take some years but the negotiations are likely to advance relatively quickly and will be very important for the overall reform mood in Serbia. They can really lock in some of the legislative changes and some of the administrative changes that are under way.”  Daunting challenge On paper, Serbia’s economic challenges look daunting. It is running Europe’s highest budget deficit at 7.1% of GDP, public debt stands at 60% of GDP and rising, and the EBRD’s latest revision to its outlook suggests growth this year could undershoot the 1.3% it was forecasting in January. The consensus among observers is for growth of around 1% – a fall from last year when the accounts were artificially buoyed by Fiat’s investment of €1bn in a car plant at Kragujevac. Reform has long been on the agenda, but the country’s economy has struggled to make the transition experienced elsewhere in emerging Europe. “Serbia has been undergoing a long process to clean out the imbalances both in the public finances but also in the private finances, so growth has not been very strong. It’s on the recovery path and I think it will continue to recover, but it’s taking longer here than in some other parts of emerging Europe,” said Marcus Svedberg, chief economist at emerging markets specialist East Capital. In March, the Progressive Party (SNS) of Deputy Prime Minister Aleksandar Vucic won 156 seats in the 250-member parliament in polls called by the ruling coalition to bolster its reform mandate. Popular for his high-profile anti-corruption platform, Vucic was seen by voters as someone who delivers. The new government was sworn in on April 27 and has already unveiled a string of legislative initiatives. In a key sign of continuity, the strategist of Serbia’s reform process, Lazar Krstic, remains finance minister. What makes this moment particularly important for Serbia is the way the pieces now sit on the chessboard: EU accession negotiations began in January and the Serbians have also been talking to the IMF. Turning a corner Svedberg said: “I don’t see it as a sharp turning point because they have been heading in this direction for quite some time, but it’s a take-off: they have much better possibilities now – Europe is out of recession, they are out of recession, they are starting to see foreign direct investment coming in, they have a reformist government, and they have finally started negotiations with the EU.” A key theme in talks with the IMF is likely to be downsizing the public sec

To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. Thanks to the Vienna Initiative, set up to stem outflows of capital by Western European lenders out of the region, the Austrian capital has built on its foundations of influence in recent years. Perhaps even the Mongol warriors knew. When the armies of Ogedei, third son of Genghis Khan, reached Vienna in 1241, they were there for a reason. The Austrian capital, powerful even then, was also viewed as the entry-way to Western Europe. Destroy it, and nothing remained between Ogedei’s men and the cities of Paris, Milan and Venice. In the end, they were saved by the Khan’s death, and the overnight disappearance of his armies from the plains of Europe. But nearly nine centuries on, Vienna remains a continental clasp, drawing together the disparate economies of Western and Eastern Europe. Vienna-based lenders, led by Erste Group Bank and Raiffeisen Bank International, remain the financial powerhouses of Central and Eastern Europe. According to the Bank for International Settlements, the combined exposure of Austrian financial institutions to the CEE region at the end of 2013 was €210bn, more than any other sovereign nation. A January 2014 report issued by the National Bank of Austria described the exposure of domestic lenders to the region as “fairly large, but broadly diversified, with more than 50% [of outstanding loans] in countries rated investment grade”. The relationship is based on trade as well as finance: the flow of Austria-made goods to the largest seven CEE states in 2013 outweighed combined Austrian exports to Switzerland, Italy and the US. “Austria is definitely still the gateway to Central and Eastern Europe,” said Michael Buhl, co-chief executive officer of Vienna’s flagship stock exchange, the Wiener Boerse (WB). Austrian corporates and banks piled into the region during the boom times of the 1990s and 2000s and remained as the clouds gathered over Europe. The Vienna Initiative, formed in 2009 by Austrian lenders and a collection of multilaterals and development banks, averted a potentially catastrophic outflow of capital by Western European lenders desperate to shore up capital in core markets. A rare example of public and private sector interests working for the common good (though the latter sometimes had to be dragged kicking and screaming to the table by taxpayer-funded multilaterals), the Initiative proved that Austrian investors “weren’t just fair-weather friends, and that our financial institutions were and will remain responsible and committed long-term investors in the region,” said Gernot Mittendorfer, chief financial officer at Erste Group Bank. “The eastern expansion of the EU and a focus on infrastructure have made Vienna one of the leading business locations on the Continent. Vienna is still the gateway to CEE and the place to be when doing business in the region,” said Gianni Franco Papa, head of CEE division at UniCredit. The same is true of Erste’s big Austrian rival, Raiffeisen. “There are no signs of a retreat [by] dedicated Western banks from CEE markets,” said a Raiffeisen spokesperson. In fact, the exposure of Austrian lenders to the eastern half of Europe has, since the advent of the Vienna Initiative, remained “more or less flat”, she said, despite the vicissitudes of two crises and a deep eurozone recession. Loyalty That’s not to say Austria’s lenders have stood still over the past five years, or failed to rejig their strategies to accommodate a changing world. Both have stuck it out in struggling CEE markets held back by the still sluggish eurozone, but they are prepared to respond decisively if political or institutional issues threaten their interests or foreign investment.  In April 2013, Erste Group sold its Ukrainian division for US$83m, booking a US$200m loss on the sale. Mittendorfer said Ukraine was the only country where

To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. When Ludwik Sobolewski became CEO of the Bucharest Stock Exchange (BVB) in July 2013, few could deny he had the chops for the job. The bourse’s president, Lucian Anghel, was quick to underline his new hire’s credentials. Sobolewski ran the Warsaw Stock Exchange (GPW) for seven years with great aplomb, turning it into the largest independent bourse in Central and Eastern Europe. Listing candidates from across the region flocked to Warsaw from the early 2000s, some bypassing Vienna, home to a much larger, CEE-focused bourse, as well as the likes of Paris, Frankfurt, Moscow, and London. Withering But since Sobolewski left under a cloud in late 2012, Warsaw has lost much of its once considerable allure. Initial public offering issuance totalled just €18m (US$24.9m) in the first three months of 2014, said PricewaterhouseCoopers in its quarterly IPO Watch Europe report, against €58m the previous year. Strengths are being perceived as weaknesses. And the government is not helping much.The rush of privatisations that opened up key sectors from banking to telecoms to energy in the 1990s and 2000s is now virtually over: the Polish state has sold, and listed, virtually every monetisable asset. Even current GPW chief executive Adam Maciejewski admitted in April this year that the privatisation process, “which for many years spurred on the growth dynamics of the capital market’s development … is coming to an end”. The decision this year by Polish authorities to seize US$51bn worth of privately run pension funds, previously controlled by institutions that held 43% of the GPW’s free-float assets, and transfer them back into state control, will further weaken its position as a regional magnet for IPOs, by making it harder for issuers to find buyers. Warsaw won’t shed all of its regional influence overnight, but recent events have unsettled investors and would-be issuers. The GPW has never been a particularly deep or liquid market, at least compared with the Wiener Boerse in Vienna. It needs fresh IPO blood to keep the oxygen circulating, and in recent quarters new listings have been become both smaller and thinner on the ground. Modelling Warsaw That throws the BVB’s smart decision to snap up Sobolewski last year into sharp relief. Romania is clearly attempting to follow the model that proved so successful for Poland for nearly two decades. Bucharest is pushing through an aggressive, Warsaw-esque privatisation programme. The November 2013 IPO of Romgaz raised US$530m, while total domestic equity capital market issuance reached US$1bn in 2013, up from US$76m in 2012. Sobolewski points to a host of forthcoming IPOs this year, from the initial stock sale of power distributor Electrica, set to raise up to US$700m, to the second-half IPO of coal power generator Oltenia. Such sales are vital for Romania’s drive to create a regional securities trading hub. “Privatisations are extremely important for the development of the local capital markets, because the positive experience of more developed economies showed that the competition for foreign investments was directly influenced by the IPOs of large state-owned enterprises,” Sobolewski said. They also suck in foreign capital, giving local pension funds and insurers the chance to expand and grow into the market they know best. Next on the tick-list: a push to complete more corporate bond sales, while listing more smaller Romanian enterprises on the BVB. Bucharest’s determination to walk in its peer’s considerable footsteps has been made publicly and regularly clear by leading BVB officials. “In Warsaw, we attracted issuers to increase the size of the market,” Sobolewski said. “Does the BVB need issuers? Yes. In Warsaw, privatisations grew the market and liquidity. Does BVB need privatisations of SOEs? Yes. In Warsaw we built out our market

To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. Sturdy Slavic reason underpins the popular Polish proverb, “Better is the enemy of good”, a deeply conservative maxim that suggests trying too hard to excel poses risks. Poland’s economic performance is undoubtedly good – banks and brokers are now revising growth forecasts upwards and the figures suggest it will lead the pack in emerging Europe this year. But a lingering sense among some observers that the country could be doing better – underpinned by a recent OECD call for more reform – highlights the dilemma at the heart of this Polish saying. “The hard and soft data both confirm a rebound in the Polish economy in coming quarters, although I’m not excessively optimistic because for Poland growth of about 3.3% this year is not very high and simply takes it close to its potential. But when we look at the situation outside Poland, things obviously look optimistic,” said Jaroslaw Janecki, chief economist in Warsaw at Societe Generale. Consensus forecasts were until recently pointing to 2.9% growth in 2014 and 3.4% in 2015, but most analysts now agree that the economy is likely to exceed these figures, with estimates ranging between 3.0% and 3.3% for this year and between 3.8% and 3.9% for 2015. Importantly, this is the right kind of growth, with a reliance on domestic demand supported by improved business sector confidence and public investment spending. Finance Minister Mateusz Szczurek has indicated that stronger-than-expected growth means Poland will make significant progress in cutting its budget deficit this year.       Domestic driving    “Everyone is assuming that Poland is growing now because of the eurozone recovery, but this year the main driver will be domestic demand. It’s a kind of a sweet spot – they are getting good support both from external and internal demand,” said Marcus Svedberg, chief economist at East Capital.  While growth will primarily be driven by domestic demand, that is not to discount the role of trade, with Poland’s current momentum starting in Germany. Regions such as Poznan have long benefited from investments by German giants such as Volkswagen, which in March said it would spend another Z3.4bn (US$1.1bn) to build a factory at Wrzesnia. A number of factors underpin Poland’s recovery and make it broadly balanced. First and foremost, domestic demand is being fuelled by growth in real disposable incomes. A long period of low inflation and low interest rates has enabled higher growth in real disposable income compared with other eurozone economies. Wage growth is stable, and unemployment, which hovered at 14% in Q1, has begun to fall, according to Labour Minister Wladyslaw Kosiniak-Kamysz. In April, the central bank Narodowy Bank Polski decided to keep key rates at an all-time low of 2.5%. Inflation is expected to stay below the 2.5% target this year. Societe Generale’s Janecki said: “I think that during this year, CPI will be even below 2% and the central bank target is 2.5%. But I still see a risk that the central bank may start to hike rates in November, although this risk is not very high at the moment and the first hikes will probably be in 2015.” Soft data are also positive, with PMI factors suggesting new domestic and external orders and a growth in investment, sales and production. In recent years it has not been uncommon for Poland to experience negative investment growth, but cash-rich companies now appear to be investing more, buoyed by EU transfers. Sound banking Underpinning Poland’s real economy performance is unrivalled stability in the financial sector, bolstered by a conservative regulator. While the share of non-performing loans increased during the financial crisis, strict regulations have meant the banking sector remains one of the soundest parts of the economy. “Poland’s banking sector is very robust, with quite a co

To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. Istanbul has set its heart on building one of the world’s busiest airports among other high-profile projects but with international financing becoming harder to secure and investors’ faith bruised by political instability Turkey’s ambitious construction projects may be slower to get off the ground. Turkey’s outlook has been rosy in recent years thanks to a fast-growing economy, a government with a long-term vision and mounting interest from private investors, keen to take advantage of the country’s high growth rates. Wedged between Europe and the Middle East, Turkey is aiming to capitalise on its strategic location by becoming a major regional transport hub that boasts high-speed rail lines, motorways and a “super” port, all on its way to becoming the world’s 10th-largest economy by 2023. Then disaster struck: a controversial corruption probe – which implicated members of Prime Minister Recep Tayyip Erdogan’s inner circle – alongside increasing political instability in the wake of the Gezi park protests, has alienated investors. Furthermore, global interest rates are set to rise, squeezing Turkey’s desirability on the international scene. HSBC’s global head of infrastructure, Arturo Recio, told audiences at a British Business Summit in Istanbul in April that new Basel III rules on bank lending could affect international long-term funding availability for project financing in many markets, including a number of projects in Turkey. An oversupply of projects, in transport, healthcare and energy, also needed to be curbed in light of the new global conditions, and as Recio says, governments around the world would need to prioritise projects.  Sky’s the limit Turkey seems determined to push ahead with its grand designs, several of which have been championed by the Prime Minister. The government even pledged to guarantee the debt of contractors on public works projects in April, with state guarantees previously limited in the wake of a fiscal crisis in 2001. “Overall, progress is definitely going to slow down a bit, given the external and internal developments,” said Istanbul-based Huseyin Ozhan, senior banker at the European Bank for Reconstruction and Development, which since 2009 has invested €3.5bn in 119 projects in Turkey, including the Eurasia Tunnel. “But I think there will be some activity in the market, even with the mega projects,” he added. For public-private partnership projects, the private sector is waiting to see more certainty, in particular the outcome of the presidential election this summer as well as the availability of financing. “Regarding the state funded projects, high-speed railways, etc, those are continuing as budgeted, without any delays,” Ozhan said. Ports and airport projects are being touted as the big areas of growth in Turkey’s infrastructure story, as sea routes gain share and trade links with the EU expand.  But projects such as Istanbul’s third airport, which Turkey hopes will become one of the world’s largest in terms of passenger numbers, eventually greeting 150m passengers a year, is under close scrutiny, especially against the global backdrop of rising interest rates and high construction costs. The 25-year tender was auctioned off for a record-breaking €22bn last year to a consortium of Turkish construction firms, but fears persist that Turkish banks lack the capacity to provide long-term large-scale funding without international help. In a bid to provide cheaper financing for some projects, the government is pledging to insure 85% of the price of projects costing over TL1bn should an agreement fall through because of the contractor’s fault. The Treasury will assume at most US$3bn for public works project debts for 2014. Nurol Holdings, which is leading the Gebze–Izmir motorway project that will include a 3km suspension bridge, sig

To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. Grin and bear it. It’s been that sort of year for the Central Bank of the Republic of Turkey, which has suffered the sort of torrid time usually reserved for panic-stricken African or Latin American markets. The US Federal Reserve’s decision to begin tapering its QE programme put the lira into a tailspin against the dollar. Branded one of the “fragile five” emerging nations due to its yawning current and fiscal deficits – both of which remain a concern – investors fled, crimping growth and driving up inflation. Yet the central bank has fought back hard this year, impressing investors with aggressive decision-making and a willingness to stand up to Recep Tayyip Erdogan’s administration. Turkey’s prime minister reacted with barely concealed fury after the central bank, refusing to bow to political pressure, raised interest rates by a hefty 500bp on January 28, after the lira hit a record low of TL2.39 against the US dollar. A fortnight earlier, it increased the marginal funding rate to 12%, from 7.75%. And there, barring a slight trimming of the liquidity lending rate on April 24, to 13.5% from 15%, borrowing and lending rates remained through the first four months of the year. It’s a situation that is far from ideal for anyone apart from yield-hungry global investors – barring Brazil, Turkey’s central bank oversees the tightest monetary policy rate of any major emerging market. But after a hard year, there appears to be light at the end of the tunnel for the beleaguered institution. “Global and domestic financial conditions have improved significantly, so the need for much tighter policy is disappearing. Improvements in risk indicators put us in a better position in regard to key interest rates going forward,” said Turalay Kenc, Deputy Central Bank Governor, in an interview with IFR. Laying the groundwork The former Imperial College London academic is not ready to pledge the return of looser monetary conditions just yet. Inflation, for decades the bane of Turkish political and economic leaders, remains a key concern; according to the state-run Turkish Statistical Institute, consumer prices rose by 8.39% year on year in March 2014, the fastest rate of increase in 20 months. Yet the CBRT tips consumer and producer prices to peak in May before declining; Kenc said that while inflation “will worsen for a month or two, prices will come down in the second half of the year, and when they do, the economic picture will look much better”. Only then will the central bank, which fears a negative reaction from investors in the event of a “premature cut in interest rates”, said William Jackson, emerging market economist at London-based Capital Economics, consider a looser policy framework. But the groundwork is clearly being prepared. CBRT governor Erdem Basci has hinted at the possibility of cutting rates; in the medium term, the monetary policy committee he oversees is likely to pursue more modest measures, such as cuts in required reserve ratios. Deputy governor Kenc flagged up this likelihood, noting that front-loaded monetary tightening adopted in January “will ease off as the inflation outlook improves. This puts us in a better position in regard to key interest rates”. The central bank’s second inflation report of the year, published on April 30, provided investors with a more refined outlook on Turkish consumer and producer prices. Some critics believe the only difference, other than vastly higher interest rates, between the Turkeys of 2014 and 2013 is that investors have a better mental grasp of the speed and scale of the Fed’s tapering process. Officials in Ankara still face many of the challenges that last year so enfeebled the economy: a yawning current account deficit, running at about 7% of output; inflationary pressures; and GDP likely, said governor Basci, to come

To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. Real estate group Emlak Konut defied the markets with its revived US$1.6bn follow-on share issue last November. Some investors, however, were stung when a corruption scandal forced them to dump their stock only weeks later, which, coupled with political instability, has left many issuers and investors waiting in the wings. Emlak, whose biggest shareholder is state housing authority TOKI, first sold shares to the public in November 2010. The REIT has privileged access to state-owned land, which it auctions to real estate developers for a share in the revenue generated. In June last year, the state-owned property developer postponed a 1.3bn-share follow-on offer set to raise more than US$2bn as civil unrest in Turkey knocked nearly 13% off the BIST 100 Index. Though the market recovered a little ground and Emlak was suspended during the deal, it was hard to find a price to suit new and existing shareholders. It finally sold 1.3bn shares at TL2.5 each in a secondary share sale in November. Lessons were learnt from the previous aborted attempt in June, when the US was left until last on the roadshow and the deal coincided with protests on the streets in Turkey. With US funds driving the rally in Turkish stocks since then, the decision was taken to split management, with one team starting in New York and then Boston, and also to accelerate the sale with just three days of bookbuilding. As a result, the US dominated the book, with more than 40% of orders, followed by the UK with 20% and the rest of world also with 20%. Domestic institutions took 10%, with the remaining 10% going to retail. “As a huge secondary public offering, it was a success at that time. But of course, after the secondary public offering, the corruption probe devastated the [company’s] reputation,” said Kurthan Atmaca, equity analyst at Deniz Invest. Shares in the property developer slumped by 14% when its chief executive officer Murat Kurum and two board members were called in for questioning amid scores of arrests tied to an investigation into allegations of graft involving government officials and public tenders. They were released after questioning, the company said, on December 22. But for many investors, particularly US funds, selling off their shares was the only option. “For most of the American-based funds, if there is any risk of corruption, even if there is speculation, they prefer not to invest,” Kurum added. Lined up Turkey is home to the cancelled ECM trade due to local market volatility often killing off trades. The country lumbers at the lower end of market cap to GDP ratios versus other emerging markets. In total last year, TL4.6bn was raised on the equity markets through IPOs and SPOs, compared with TL5.1bn of funds raised on the equity markets in 2012, with the lion’s share coming from Emlak’s secondary public offering (about TL3.25bn), according to data from Borsa Istanbul.  However, in the long term, Turkey’s capital markets are expected to pick up speed, with more companies opting to turn to the equity markets.    “The speed of IPOs has declined over the last year or so, but looking forward, I think more companies will be inclined to open to the public in order to tap into an equity investor base. I can see that happening, especially when your cost of financing increases… We’ve started to have a positive change and corporate culture in favour of capital markets, also evidenced by the increasing number of corporate bond issuances,” said Didem Gordon, CEO of Ashmore Turkey. For now, political instability and the corruption scandal have stoked high levels of volatility across the financial markets in Turkey, scuppering hopes of any large IPOs in the near term. Local election results on March 30 prompted a strong rally on markets, with the outcome viewed as reducing political uncertai