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CEEMEA Sovereign Credit Navigator – 26 June 2017 Summary

Core Content

This report provides an analysis of sovereign credit performance in the CEEMEA region (Central and Eastern Europe, Middle East, and Africa) and outlines key investment recommendations based on credit spreads and market conditions. The report is issued by BNP Paribas London Branch and focuses on the impact of macroeconomic factors, such as oil prices, political tensions, and central bank policy, on credit risk and spreads.

Main Points

• Market Outlook: The report adopts a more defensive tone due to concerns over a broader risk-off environment. This is attributed to the sharp decline in oil prices, which has increased front-end real rates, and the potential for the Fed to unwind its policy in July, which may trigger outflows from emerging market (EM) credit.

• Investment Recommendations:

  • Recommend buying 5-year CDS on South Africa and Saudi Arabia as tactical defensive trades.
  • Suggest switching from Poland into Hungary due to its relative outperformance.
  • Highlight the importance of monitoring Romania due to risks to its fiscal deficit and political uncertainty.

• Performance Recap:

  • CEEMEA sovereign $ credit ended the week 6bp wider on average.
  • The worst performers included Kenya (24bp wider), Azerbaijan, Russia, and Bahrain.
  • Lower-beta CEE countries such as Slovenia and Romania outperformed, with spreads 1-2bp tighter.

• CDS Basis Analysis:

  • The CDS basis for South Africa, Russia, and Turkey is near three-month lows.
  • In a risk-off environment, the basis is expected to correct towards more historically average levels.

Key Information

1 Week Performance

Outperformers:

• Rwanda (-6bp)
• Namibia (-4bp)
• Israel (-3bp)
• Slovenia (-2bp)
• Romania (-1bp)
• Ukraine (-1bp)
• Latvia (0bp)
• Abu Dhabi (0bp)

Underperformers:

• Kenya (24bp)
• Angola (23bp)
• Iraq (21bp)
• Azerbaijan (17bp)
• Bahrain (15bp)
• Ethiopia (13bp)
• Russia (11bp)
• Ivory Coast (11bp)

Z Spread Changes ($ Bonds)

CDS Basis for South Africa, Russia, Turkey

CEEMEA 5s-10s-30s Spreads

€ vs $ Comparison

The report compares the relative value of € and $ bonds across various countries. For example:

• Romania: €4.625% '20 vs $6.75% '22
• Israel: €2.375% '37 vs $4.5% '43
• Poland: €4.5% '22 vs $5% '22
• Qatar: €2.375% '20 vs $4.875% '26
• KSA: €5% '20 vs $5% '20
• Turkey: €5.125% '20 vs $7% '20

The report emphasizes that the Z-spreads for these bonds are calculated and compared to assess relative value. A green cell indicates that the 'buy' bond is trading historically wide relative to the 'sell' bond.

Relative Value Analysis

The report provides a detailed analysis of the relative value of sovereign bonds in the CEEMEA region, with a focus on the 5s-10s-30s spread differentials. It highlights that certain bonds, such as Croatia 2020, Croatia 2021, Croatia 2023, and Croatia 2024, are trading historically wide relative to their peers, indicating potential value opportunities.

• Croatia 2020 shows a differential of -0.1 to 0.1.
• Croatia 2021 has a differential of -0.1 to 0.5.
• Croatia 2023 ranges from -0.2 to 1.4.
• Croatia 2024 spans from -0.7 to 0.5.

This data is used to inform investment decisions and identify bonds that may offer better value based on their spread performance.

Conclusion

The report outlines a defensive strategy in the context of a risk-off market environment, emphasizing the importance of monitoring oil prices, political tensions, and central bank policy. It recommends specific bonds and CDS as tactical defensive trades, particularly in South Africa and Saudi Arabia, and highlights the relative outperformance of Slovenia and Romania in the CEE region. The analysis of Z-spreads and CDS basis provides insights into the current market conditions and potential opportunities for investors.