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Pension funds 'to trigger corporate CEE bonds'

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  • Pension funds 'to trigger corporate CEE bonds'

CEE - The growth of funded second pillar systems in Central and Eastern Europe will lead to more and more corporates in the region issuing bonds, analysts from the Austrian Erste Bank group have predicted.

The amount of outstanding corporate bonds in Romania, Poland, Turkey, Slovakia and Croatia, are well below the 10% percentage of the GDP, as only the Czech Republic (10%) and Hungary (13%) surpass that mark.

In comparison, oustanding corporate bonds make up 70% of the GDP in the Eurozone.

According to Erste Bank analysts, this imbalance has historical reasons including little developed stock markets, a strong affiliation of companies to banks, high liquidity of banks in the region as well as high fixed costs for issuing a bond.

That said, various factors will alter these conditions, Alihan Karadagoglu, credit research analyst at Erste Bank, told journalists in Vienna.

He noted high economic growth will lead to a growth in investments as more money is needed, while the Basel II banking regulations will have an affect on the level of interest on credit as the creditworthiness of debtors is weighed higher.

"And the introduction of three-pillar systems as part of social insurance forms will increase demand for corporate bonds," Karadagoglu added.

The problem with these investments has so far been that most pension funds in the region are not allowed to invest in unrated financial instruments and this requirement is unlikely to change.

"There is a real effort by these countries to get more companies rated," Karadagogl pointed out to IPE, noting this issue was one of the issues raised at a conference in Romania organised by rating agency Moody's in May.

Rainer Singer, co-head macro/fixed income CEE at Erste Bank, added there was also "pressure on the companies to get rated".

This, in turn, leads to an increased use of IFRS accounting standards and a higher level of comparability of CEE bonds with their Western European counterparts, he suggested.

Erste Bank figures already show key players such as large power suppliers or banks in the region could "generate higher yields than most West European peers" if they issued bonds.

Analysts are convinced this will attract large institutional investors in the region and help the corporate bond market develop.

Asked whether inflation could hamper the development, Singer said he believed investors will soon go back into those markets as inflation in the region will peak some time around now.

"After that fear will be replaced by greed," he added.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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