Overview

This week's highlights were India's Budget announcement that it plans to sell sovereign bonds internationally, Germany's initial move towards Green/Social bond issuance, positive focus on Italy, which successfully sold 50-year debt, and greater market concerns regarding Turkey and Mexico after the presidential removal of the former's central bank Governor and the resignation of Mexico's Finance Minister over policy disagreements.

Emerging markets

Indian Finance Minister Nirmala Sitharaman stated in the 5 July Budget that India would seek to undertake international borrowings to help fund its budget deficit and benefit from strong prevailing demand. She stated that "India's sovereign external debt to GDP is among the lowest globally at less than 5%", and that the government "would start raising a part" of its program in foreign currencies.

Economic Affairs Secretary Subhash Garg subsequently suggested this was unlikely to exceed "10-15% of the total borrowing, which makes it roughly USD10 billion". Further details potentially will be released in September.

Turkey's Central Bank governor Murat Cetinkaya was dismissed unexpectedly on Saturday 6 July by presidential decree. He was replaced by Murat Uysal, a central bank deputy governor previously at Halkbank, a state-run bank. Turkey's EMBI+ index worsened from 458 to 480 basis points over US Treasuries on the news.

Tunisia launched a seven-year Euro-denominated benchmark deal with initial guidance of 6.875%. It went on to sell EUR700 million at 6.375% (roughly the maximum USD800 million authorized) with demand reaching EUR2.2 billion from 182 investors. Last October it placed EUR500 million of five-year debt at 6.75%.

Romania has raised a further EUR2 billion from the international markets, placing EUR1.4 billion of 12-year debt and tapping its 30-year outstanding bond with an additional EUR600 million. Ziarul Financiar website flags that this takes total international borrowings in 2019 to EUR5 billion, versus an initial target of some EUR4.25 billion.

Two Mexican issues will test market appetite after the sudden resignation of its Finance Minister Carlos Urzua, citing policy differences with the AMLO administration, with a Twitter statement that some policy decisions lacked "sufficient foundation". The move triggered an initial fall of 2.25% in the Peso versus the US dollar. Real estate investment trust Terrafina is meeting investors this week, seeking international debt to fund the repurchase of existing 2022 liabilities and fund expansion. Leasing company Docuformas is also planning issuance to refinance existing 2022 debt.

Italy and Germany

Italy has been in positive focus after it avoided the European Union starting an Excessive Deficit Procedure. In the week to 5 July, its 10-year bond yield declined 35 basis points to 1.73%, trading as low as 1.585 on 3 July.

In response, Italy returned to the market with its second syndicated deal in a month. On 9 July, it gained some EUR17.5 billion in demand for a EUR3 billion tap of its 50-year 2.8 2067 bond, at 2.877%, pricing 11 basis points over its 3.85% 2049 BTP. Italy's Treasury has announced that some 200 investors were involved.

During 8 July, Italy's Unicredit completed an accelerated book-building for its remaining 18.3% stake in FinecoBank. It placed 111.6 million shares at EUR9.85 each, a 4.4% discount to the prior closing price, to raise EUR1.1 billion.

Also, from Italy, Mediobanco gained over EUR1.35 billion of demand for a EUR500 million six-year preferred senior issue. The deal was described as tightly priced, coming through theoretical fair value.

A Financial Times report claims that Germany is considering Green Bond issuance in 2020. It reported on 9 July that the Finance Ministry currently is reviewing such options and cited a German Finance ministry statement that "this process must be conducted with utmost scrutiny and discretion".

The Ministry's own website notes that its Sustainable Finance Committee held a constitutive meeting on 6 June 2019, setting itself "an extensive work program which will be further developed on an ongoing basis". However, "the details are still being coordinated".

Our take

Overall India has sizeable borrowing needs - 3.3% of GDP in the budget projection - and a sizeable public-sector debt stock of 69.8% of GDP. However, it has no international bond debt outstanding whatsoever. This ensures high focus on its planned sale, which is likely to attract very strong demand on rarity grounds.

One other benefit cited by Indian media is that sovereign debt sales could provide clearer and tighter benchmarks for Indian corporate and financial sector issues.

IHS Markit views the renewed interference in Turkish central bank policy as risking hurting sentiment materially over time. Despite the initial jump in Turkish bond yields, the market's move so far has done no more than take Turkey's EMBI+ index back to the levels prevailing in late June. It is unclear whether the modest dislocation reflects intervention in bond markets: in the currency market Turkey reportedly spent GBP1.4 billion equivalent of its reserves on 8 July after facing a 3% fall in the Lira.

Turkey's next MPC meeting on 25 July thus will provide important indicators of its stance. This had been expected to cut rates to reflect recent improvements in the inflation rate, but a sizeable cut would suggest potential political interference. Another important indicator will be whether the US imposes sanctions on Turkey for its purchase of Russian air defense systems.

Conversely, indicators for Italy are clearly positive. Its further long-dated bond sale was successful, reflecting current investor use of long-duration instruments to improve returns. Unicredit's share sale strengthens the capital position of one of Italy's largest banks, with the discount required looking modest. Mediobanca's deal also was healthily oversubscribed. For the time being, sentiment towards Italy thus has improved. However, Italy's fiscal position remains exposed to economic slowdown, and it would seem premature to rule out the risk of market dislocations at a later stage.

Germany is an obvious candidate for Green Bond issuance. However, it appears at an early stage of preparation, and issuance would not be until 2020 (or later).

Posted 12 July 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence