High Yield Fixed Income Issues in EM
- The announced exchange rate flexibility should help the Nigerian government to stabilize the situation in the FX market and increase the budget revenue.
- Turkey’s central bank continued to ease its monetary policy on Tuesday, which is positive for the local bonds. Another positive factor is that Mehmet Simsek has retained his position in the Turkish government.
- Strong demand for diamonds will support prices at least at the current level and may positively affect diamond producers’ bonds and shares. Petra Diamonds’ Eurobonds: BUY recommendation
- the results of the Russian Eurobond placement, as it seems that the government has achieved its key goal – to sell its bonds to the international investors.Positive
- • Chinese consumer sentiment continued to worsen in May.
- 1MDB’s problems continue to gain momentum creating hard-to-assess political risks for investors: Malaysia
- Japfa didn’t provide any detailed information on how it will use the proceeds from the share placements but we don’t see downside risks for creditors at the moment.
- The Brazilian president’s fiscal reforms announcement will have a limited effect on the market due to a lack of information on the details and the probability of reforms approval.
- Wesley Batista’s comments confirm JBS’s wish to become an international global company and to achieve cheap funding. We confirm our position that the company is operationally perfect, and BRL growth is the only material risk for it.
Economy drivers now:
Greece’s creditors reached an agreement that will bring EUR10.3 bln of financial aid to the country that struggles with a huge EUR321 bln of debt. During the yesterday meeting of the euro-area finance ministers, the IMF stood down from its hardline stance of delaying aid to the country. Creditors seek Greece to achieve a primary budget surplus of 3.5% of GDP in a medium-term.
China, the Fed and oil prices are the main market drivers for now.
Oil continues to recover after the Fed comments as the speculations are growing the global glut has shifted to the deficit. It is important to point, that the latest dynamics in the oil market was due to a sharp and temporary production decline in Canada and Nigeria
It will be difficult to assess how long will it take producers to restore the dropped output, but in the short-term expect further price growth.
On Tuesday, the National Bank of Hungary has cut its benchmark 3-month deposit rate by 15 bps for the 3rd consecutive month, to 0.9%, in line with analyst forecasts. The regulator said it may hold rates for the extended period.
Turkey’s central bank continued to ease its monetary policy on Tuesday, which is positive for the local bonds.
Turkey’s central bank has cut its overnight lending rate by 50 bps to 9.5% for the third consecutive month on Tuesday,. The one-week repurchase and overnight borrowing rates were left at 7.5% and 7.25% respectively. I
INDUSTRY Strong demand for diamonds will support prices at least at the current level and may positively affect diamond producers’ bonds and shares. We confirm our recommendation to Buy Petra Diamonds’ Eurobonds.
De Beers completed its fourth offering of rough diamonds this year, which signaled a stronger-thanexpected demand during what is usually a weaker quarter. The company sold USD 630 million of diamonds in May, down from revised USD 666 million from the previous sale, but up from the USD 545 million in January.
NEW ISSUES: Russia sold with the initial guidance of 4.65% to 4.90%. The main buyers of the Eurobonds were investors from Great Britain. Investors bid about USD 7 billion for the bond and more than 70% was sold to foreign investors, Russia’s Minister of Finance, Anton Siluanov, said.
REGION SUMMARY Negative dynamics prevails in Asia today. Malaysia 10Y USD sovereign bond is down 19bps and China’27 is loosing 38bps. Indonesian 10Y USD sovereign bond is slightly higher.
MACRO :Chinese consumer sentiment continued to worsen in May. Decline in the expected personal finance index was less pronounced than the current situation assessment indicating that consumers may not rush to abruptly cut their spending. However, the overall the indicator points to a further potential slowdown in consumption this month following softening in April.
China Westpac-MNI consumer confidence index dropped to 114.2 in May from 117.8 a month earlier.
1MDB’s problems continue to gain momentum creating hard-to-assess political risks for investors. We think the yields offered by Malaysian corporates don’t justify risks associated with the potential development of a Brazil-like scenario
1Malaysia Development Berhad (1MDB) is a strategic development company, wholly owned by the Government of Malaysia.
Singapore’s authorities shut local unit of Swill bank BSI due to its involvement in 1MDB’s transactions while the Swiss authorities launched criminal investigations into the bank.
MACRO The Brazilian president’s fiscal reforms announcement will have a limited effect on the market due to a lack of information on the details and the probability of reforms approval.
Yesterday, the Brazilian president announced some measures that may help to reduce the country’s accelerating fiscal crisis. Michel Temer promised to limit subsidies and approve a cap on the government spending. Additionally, he expects his administration could improve the corporate governance in the public pension funds and state-owned companies like Petrobras. The finance minister also announced some details and noted the spending ceiling will be adjusted according to YoY inflation. The ceiling will spread on the health and education sectors.
Additionally, the government is seeking BNDES to pay its debt for Treasury that amounts USD 28 bln. Besides, the government is considering using funds from the sovereign wealth fund to pay off its public debt. Subsidies and spending limitations are structural reforms that need to be approved by the Congress.
- Marfrig announced its plans to issue USD denominated bonds to refinance existing debt.
JBS’s CEO Wesley Batista commented on the company’s restructuring. He pointed that this shift is only an effort to reduce the company’s funding costs. Besides, it better reflects the company’s business as a global meat producer. With a high probability, the company’s registration will go from Brazil to Ireland. At the same time, Batista noted that this shift was not an effort to reduce a tax burden. We confirm our position that the company is operationally perfect, and BRL growth is the only one material risk for it