Thursday, January 17, 2013

JP Morgan gives fresh impetus to Romania debt

By Radu Marinas

BUCHAREST, Jan 16 (Reuters) - Romania's borrowing costs dropped to record lows on Wednesday after JP Morgan said it would include the country's debt in an emerging market index.

Bond yields have now fallen by around one percentage point since a December parliamentary election gave leftist Prime Minister Victor Ponta a mandate to conclude a new deal with the International Monetary Fund.

The JP Morgan announcement overnight drove a further rally in Romania leu-denominated bonds on Wednesday that took 10-year yields below 6 percent for the first time, the latest in a series of successive lows.

JP Morgan said Romania's potential weight in its flagship GBI-EM Global Diversified index could be 0.54 percent, given a market capitalisation of $3.5 billion. The bonds will be included from March 1.

Werner Gey van Pittius, who co-manages Investec's emerging debt funds, took an overweight position in Romania last year anticipating its inclusion and estimated the JP Morgan move could bring almost $1 billion of inflows.

"From benchmark-relative investors like us, there is a lot of money that will come in for sure but the question is how many people will have anticipated this already," van Pittius said.

Romania had already been included in a Barclays index in November and its inclusion in both should increase the pool of investors and boost the small secondary market.

Nigeria's 10-year yields have fallen more than 4 percentage points since JP Morgan said last August it would include Nigerian naira bonds in its GBI-EM index.

Romania is paying about 5.5-5.6 percent on five-year debt, already the lowest since the 1989 fall of communism, even though its benchmark official interest rate is 5.25 percent, far higher than those of emerging EU peers Poland and Czech Republic.

Despite recent falls, yields in Hungary - where Prime Minister Viktor Orban's unconventional policy mix has alarmed investors - remain a little higher.

The Romanian rally has also helped the leu currency strengthen to a one-year high of 4.32 against the euro .

A Bucharest dealer said there was already high interest in new Romanian debt issues "and because of Romania's inclusion in JPM's index, the secondary market will see a boost together with foreign investors' interest."

Borrowing costs rose and the currency fell through 2012, largely because of concerns about policymaking and Ponta's failed attempt to impeach President Traian Basescu.

Ponta's election win should bring more predictability to policymaking and he is expected to replace a 5 billion euro ($6.7 billion) deal with the IMF with a new agreement after March, which would act as an important vote of confidence in his economic policies.

Analysts and dealers expect Bucharest to take advantage of the market rally to front-load sales and say bonds could rally to 5.25 percent for paper longer than one year, with the leu strengthening as far as 4.25 per euro.

With a budget gap set to fall below 3 percent of gross domestic product for 2012 and gross debt at one of the lowest levels in the European Union, Romania has already sold 6.9 billion lei ($2.1 billion) in local currency debt in January, more than a third of its target for the first quarter.

It also wants to raise 2.5 billion euros ($3.3 billion) on international markets for the whole year. ($1 = 3.2577 Romanian lei) ($1 = 0.7492 euros) (Additional reporting by Carolyn Cohn and Sujata Rao in London; Editing by Ruth Pitchford)

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