Investors see opportunity in gov't debt

by Roseanne Gerin

The government will issue at least twice as much public debt this year to cover an expected increase in the country's budget deficit as well as the costs of outstanding treasury bonds and bills, economists said last week.
"Because the budget deficit is the biggest threat to the economy, you have to finance it," said Paweł Kielek, a fixed income trader at ABN Amro Bank in Warsaw.
The government will issue zł. 61 billion ($14.9 billion) in nominal value debt, an increase of 65% over the zł. 37 billion ($9 billion) it issued last year, said Jacek Wiśniewski, the head of treasury research at Bank Pekao, who calculated his total based on the two-year, five-year and 10-year fixed-rate bonds and 10-year floating rate bonds that the government plans to issue in 2002.Last year's budget deficit reached about zł. 32.58 billion ($7.95 billion) or about 4.5% of gross domestic product. The Finance Ministry projects that the deficit will reach zł. 40 billion or 5% of GDP by the end of 2002.
Poland's federal budget deficit is primarily financed through government debt issues or privatization revenue. Two years ago, revenue from the sale of state-owned assets hit an all-time high of zł. 27.2 billion ($6.63 billion) but sales of state assets are expected to bring in only zł. 6.8 billion ($1.66 billion) this year.Government bond auctions for zero-coupon bonds and two-, five- and 10-year fixed-rate issues this year would total about zł. 48.6 billion ($11.85 billion) in nominal value, or 50% more than last year, said Maciej Reluga a senior economist at ING Bank. Of this amount, zł. 20.3 billion ($4.95 billion) would be offered to pay for debt issues maturing in 2002. He added that the government's net issuance of bonds would be about zł. 28.3 billion ($6.9 billion), a zł. 16.7 billion ($4.07 billion) increase from last year.
The increase in paper is also necessary to cover high interest rates on treasury bonds issued in previous years as well as pay for redemptions of bonds maturing in 2002.
Marek Stypułkowski, a government bond trader at Raiffeisen Bank Polska, said the costs of debt servicing would consume 20-25% of the government's budget spending this year.
"The costs of (financing the debt) are growing and in the long term it could mean that debt would increase compared to GDP," he said. The government's total public debt last year was 40-43% of GDP and will reach about 47.5% of GDP by the end of 2002 - the highest it has been in the last four years, according to economists. If government debt hits 60% of GDP, fiscal authorities would be forced to implement severe spending measures and balance the budget.
The Finance Ministry has held three tenders for government bonds this year - all over subscribed. The mood of investors has been good due to the high yields of Polish paper compared to other countries, such as the eurozone where they are 3-4%, analysts and traders said. "The market took it aggressively and investors were very interested in this paper," said Witold Chuść, a fixed-income analyst at Bank Handlowy, about the 10-year fixed-rate treasury bond.About 25-30% of the issues, especially for the five- and 10-year notes, were purchased by foreign investors, traders said, with domestic pension funds and banks buying the rest.
Some analysts cautioned that the złoty's movements could impact foreign bondholders who bear more currency risk. "While (the złoty) is strong, there will be currency risk for investors," Chuść said, "(but) depreciation might take additional profits on yields for offshore investors."
The foreign exchange market has started to settle after a recent marked drop in the złoty. The złoty was traded at 4.16 against the dollar and at 3.63 against the euro at midday Friday.
Reluga also said foreign investors would buy government bonds until the government cuts interest rates, which would likely cause a dip in bond yields. The government's rate-setting Monetary Policy Council (RPP) is expected to cut the key interest rate by 100-150 basis points from 11.5% during its first yearly meeting on Jan. 29-30.