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A slow-trading day in Asia due to Lunar New Year.

Bonds: 2-year Indonesian Eurobond yield is higher by 7bps while longer-end yields are marginally lower. The Indian bonds have little changed. China and Malaysia are closed for a holiday.Asia daily 5

MACRO  Large decline in China FX reserves was expected given a sharp fall in local asset prices in January. The pace of decline was lower than in December, however, still one of the highest on records. We believe, the outflows will persist for some time and put pressure on the Chinese companies’ bonds – not our favorites at the moment.

Chinese foreign exchange reserves declined in January by USD99.5bn to USD3,231bn. This is lower than decline of USD107.9bn in Dec’15. In 2015 FX reserves declined by USD512.7bn.

INDUSTRY  Positive news on India steel industry were published today. Data on steel imports may indicate the protective measures are eventually taking a toll on imports which is starting to gradually decline. Imports of steel in India has increased in 2H15 despite the introduced protectionist measures.

CORPORATE  Rio Tinto will report 2015 results on 11 Feb’16, while BHP Billiton will announce 1HFY16 results on 23 Feb’16. Although surprises are possible, we don’t expect anything that will change our positive mid-term view on these companies’ Eurobonds. As we have previously noted, we prefer RIONL’25 on attractive valuations.



REGION SUMMARY As the commodities remain relatively stable, the Eurobonds will keep trading at current levels. We could see some pressure in Azeri bonds due to the rating downgrade.


In 2016, Russia may place loans in the international markets or spend its reserves due to a relatively high budget deficit. Actually, we do not believe in successful sale of stakes in state companies.

According to Kommersant newspaper article, Russia’s amended state budget for 2016 and a new anti-crisis plan are based on Economy Ministry’s forecasts that assume USD 40 average price per bbl for Urals oil. The amended budget envisions 5.1% GDP fiscal deficit, 0.9 trln rubles income from privatization of state assets. The real GDP seen contracting 0.8% in 2016, industrial output shrinking 0.3%, inflation seen at 8%-8.5%.


Moody’s decision on the Azerbaijan rating may cause another wave of sales in Azerbaijan Eurobonds, following the negative market reaction to the sovereign rating downgrade by S&P late January.

Moody’s has downgraded Azerbaijan’s government bond and issuer ratings to Ba1 from Baa3 and placed the ratings on review for further downgrade. The key drivers for the downgrade were the impact of further oil decline on Azerbaijan’s economic strength, as the country is highly dependent on hydrocarbons; the related and rising pressure on Azerbaijan’s financial system and balance of payments position; the resulting deterioration of fiscal position and government debt metrics. Recall, on Jan, 29, S&P also lowered Azerbaijan’s sovereign rating from BBB- to BB+.

INDUSTRY : Higher risk ratios on foreign currency Eurobonds may reduce the demand on these assets from Russian banks, which may trigger a market correction.

The Russian central bank proposes to set 1.1x risk ratio on FX loans provided to companies after April, 1, the regulator says. Bank of Russia proposes to set a 1.1x risk ratio on FX denominated bonds bought after April, 1, and 1.5x risk ratio on investments in securities of non-residents. These measures should reduce FX risks in the banking system, according to CBR statement.

NEW ISSUES  Poland may sell yuan-denominated bonds. As reported, Polish Finance Ministry delegation might visit China in March or April to discuss the potential sale.

The Russian Finance Ministry sent out requests for proposals to 20 foreign and 3 local banks on Eurobond sale.


LATAM images (31)


Latin American region was relatively flat on Friday. Investors are cautious due to high risks for oil prices. The Brazilian market performance was slightly worse on the back of concerns over the increased government’s 2016 fiscal target.

MACRO Speculations increased the Brazilian government might refuse from its 2016 fiscal target. Investors should be prepared for further sovereign credit ratings downgrades.

According to the Brazilian newspaper Folha de S. Paulo (Folha), the country’s finance minister is considering to make the fiscal target more flexible. It increased speculations the government might abandon its 0.5% primary surplus (before interest payments) fiscal target for this year. Folha added, the government would slow the pace of spending cuts this year. Planning minister noted the government still hadn’t decided on spending cuts in the 2016 budget, but the amount would be less than in 2015. This newsflow is negative for the country’s capital market. The probability of further sovereign credit rating downgrades increased. Brazilian investors should be focused on fundamentally strong ideas only.

Investors should be prepared for a positive Chilean capital market reaction to stronger than expected data:

In January, the Chilean economic activity index increased 1.5% which is more than analysts expected. According to the country’s finance minister, investments in mining industry dropped dramatically due to copper decline. Currently, only the services sector is supporting growth. The minister added the government’s 2.75% growth target for 2016 was very high. Policy makers will update 2016 growth expectations in the nearest future. Expect some positive market reaction to this announcement.


Fitch’s credit action on Gol will have some negative effect on the company’s bonds. Investors should avoid this credit due to unacceptably high risks:

Fitch downgraded Gol Linhas Aereas Inteligentes (Gol) to CCC from B-. The agency pointed at a very high default or debt restructuring probability in the next 1-2 years in the absence of capital injections. The main negative drivers for the company are deep economic recession in Brazil (pressure from the demand side) and BRL depreciation, as almost all revenue is denominated in BRL and 80% of debt is denominated in USD. According to Fitch, the mentioned drivers sapped the company’s ability to gain from lower fuel prices. The agency expects negative trends to further deteriorate Gol’s cash flow generation and liquidity. The company has a B3 (Neg,) rating from Moody’s and B-(Neg) from S&P. Previously, we warned our clients about high risks related to the credit. Investors should further avoid the company despite the potential capital injection, as risks are unacceptably high.


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