Highlights • Regional fixed income securities traded mixed in October. After three failed cease-fire attempts by international mediators, the situation in the Nagorno-Karabakh region remains escalated, while Turkish lira hit new lows as Turkish Central Bank (CBT) left the policy rate unchanged, contrary to expectations of a sizeable hike. • In its recent Global Financial Stability Report the IMF staff pointed out that bond spreads “appear to be too compressed relative to economic fundamentals” in both, advanced and emerging markets. The main reason behind this decline in spreads is unprecedented policy support, according to the IMF. • Growing number of empirical evidence points out that major advanced economies’ monetary policies, particularly the Fed’s, have substantial quantitative effects on emerging market economies, as dollar remains to be the most important funding and trading currency. According to the IMF staff calculations, US policy actions account for 25%-50% of the decline in emerging markets’ long-term interest rates. More precisely, expansionary policy measures since COVID-19 have reduced emerging markets’ long-term bond yields in the range of 30–60bps out of the total of 120bps decline since the peak in March. Monetary easing in advanced economies has also contributed to the appreciation of emerging market currencies by several percentage points. • According to the IMF calculations, capital flows were very volatile in March and April, when the Caucasus and Central Asia region (Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan) saw estimated US$ 0.7bn capital outflows. With marginal positive flows seen in summer months, cumulative outflows from the region since the start of the crisis still remain negative at c. US$ 0.5bn. • CBT surprised the markets by keeping its 1-week repo rate at 10.25% against the Bloomberg consensus of 175bps hike. This came in more surprising after the 200bps hike in the key rate last month, when hopes for more reliable and predictable policy were strengthened. Other regional monetary authorities kept policy rates unchanged given high uncertainty and a two-way pressure on inflation expectations. Excluding Turkey, all other regional central banks had reduction guidance on the latest meetings, due to prevailed weak demand and prolonged recovery hinted by renewed IMF outlook. • The surprising move from the CBT and rising tensions between Turkey and US sent lira to a record low in October (depreciating by 8.2% m/m), trading above 8.0 against USD for the first time (8.3/US$ by 30 Oct). Some investors warned that CBT might need emergency rate rise if “the currency continues to spiral lower”, which was denied by the CBT governor, however noted that borrowing costs in the system would rise in the coming weeks. From other regional currenciess RUB and GEL were the weakest performers in October, depreciating by 2.4% and 1.5%, respectively. AMD and BYN depreciated by 0.8% and 0.7%, respectively, while other currencies remained mostly unchanged. • Armenia’s sovereign Eurobond continued poor performance, with the yield jumping by 28.3bps in October, while risk sentiment on Azerbaijan somewhat improved, with the yield on AZERB 24 down 25.3bps, but still above pre-conflict levels. TURK 21 and UZBEK 24, performed also weakly, with the yields increasing by 15.7bps and 12.6bps, respectively. Other regional Eurobonds benefited from the improved risk sentiment, with the yields dropping in the range of 18-90bps. UKRAINE 21 was the best performer in October, followed by BELARUS 23 and GEORGIA 21. • Among Georgian placements, surprisingly Silknet and Geocap were the best performers of the month, with the yields hitting 8-month low by end of October. Yields on SILKNET 24 and GEOCAP 24 narrowed by 69bps and 45bps, respectively. GOGC 21 gained in October, with the yield down by 18.4bps, while yield on GRAIL 22 widened by 21.5bps. Yields on Georgian banks widened in October in the range of 11-16bps.
Please see the full report for detailed coverage of the fixed income markets of Georgia, Armenia, Azerbaijan, Belarus, Kazakhstan, Ukraine, Russia, Turkey, Uzbekistan.
