Sovereign borrowers in the central and eastern European region are being left behind in the global shift towards green, social and sustainable issuance. Not only are there much stronger market conditions this year, but investors are pouring back into the region. Now should be the time for sovereign issuers in the region to press ahead with labelled issuance and innovative structures.
Speaking at the virtual CEE sovereign GSS workshop hosted by OMFIF’s Sovereign Debt Institute in June, an emerging markets investor said he was ‘quite disappointed’ with the development of the CEE GSS sovereign bond market.
‘Last year, we only saw Hungary coming repeatedly to the market as a sole labelled issuer, while elsewhere in emerging markets, we have seen quite a healthy pipeline – in Chile, Colombia, Mexico, Uruguay. They have all been coming to the market with local currency, hard currency and even with sustainability-linked bond structures. In Asia, we have seen Indonesia, Thailand, Malaysia, Philippines all tapping that market but this [CEE] region was really left behind.’
The investor continued, saying that he hoped the lack of GSS issuance from sovereigns in the CEE region would change this year, with Romania expected to make its debut in the format. Other sovereigns are also expected to bring labelled issuance. ‘There are a number of other countries who should come or return to the market,’ said the investor. ‘We haven’t seen Poland since 2019.’
On why there was such a lack of GSS issuance from the CEE region, the investor replied that it ‘really is a question to the issuers… Why have they decided to use the conventional tools rather than relying on their existing [GSS] framework or coming up with a new framework?’
Last year, the reason for a lack of GSS issuance was that CEE sovereigns had to prioritise getting their core funding due to extremely volatile market conditions. However, this year, market conditions are much more conducive so issuers should now be encouraged when looking at the GSS market.
There has been a debut sovereign issuer from the region this year after Turkey dazzled with its maiden green bond in April, raising $2.5bn with an order book more than three times covered. Investors at the OMFIF workshop commended Turkey’s transaction and framework, however, there was a wider call for more ambition by all issuers with their GSS frameworks.
‘We would like them to be a little bit more ambitious in limiting the refinancing of the proceeds, reducing slightly the lookback periods. They tend to be very long, three plus years or not even specified in some cases. We would like that to be two years and shorter,’ said a senior emerging markets portfolio manager.
In a poll of attendees at the workshop, 100% of respondents echoed that CEE sovereigns need to be more ambitious with their GSS frameworks. Sovereigns can show more ambition with their frameworks through the adoption of SLBs, where the issuance is tied to key performance indicators that result in a step-up or a step-down in the coupon – depending on exceeding or missing their targets. So far, only two sovereigns have issued SLBs in Chile and Uruguay, but could this product catch on with CEE sovereigns?
‘There will clearly be appetite for this type of bond, assuming that you have a really credible structure and you have ambitious KPIs,’ said an investor. Issuers, however, are less sure about moving in the direction of SLBs, with a focus – at least, for now – on use of proceeds structures.
A senior treasury official at a CEE sovereign said he was ‘willing and prepared’ to look at structures, such as SLBs, as a way ‘to accelerate our transitioning to a sustainable economy’ but added that there was not enough ‘adequate data’ and that there would be ‘difficulties to set strategic targets’ to be met in a certain time horizon.
The bottom line is that SLBs are a novelty that issuers are still only beginning to understand. With a lot of coordination required across different ministries, there is also difficulty in assessing the required level of ambition in setting KPIs for SLBs by sovereigns. For example, what does it mean for a sovereign to go beyond business as usual when, arguably, governments should intrinsically be doing so as part of their remit anyway? It is clear that more guidance is needed before this product is widely adopted by sovereigns.
Burhan Khadbai is Head of Content at the Sovereign Debt Institute at OMFIF.