* Snap election casts doubt on pace of privatisation
* Some investors confident Slovenia will pursue selloff
* Bond sell-off seen luring back buyers
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, July 11 Uncertainty over whether
Slovenia will pursue its privatisation plan at full speed after
Sunday's snap election has cooled demand for its bonds among
investors keen to see the small state shore up its finances.
The market sell-off since the end of June is proof that
domestic affairs still matter to investors in euro zone bonds,
at a time when many say European Central Bank largesse is
blunting the market's function of pushing governments to reform.
But some investors see the rise in Slovenia's 10-year
borrowing costs to five-week highs as an opportunity to buy the
bonds. They are betting that a new government - likely to be led
by political newcomer Miro Cerar - will pursue plans to reduce
the state's 50-percent stake in the economy and cut the budget
"There's quite a lot of political risks at the moment given
the upcoming elections, given the privatisation which has been
going slower than anticipated," said Bob Maes, senior fixed fund
manager at KBC Asset Management that holds Slovenian bonds.
"So we are still a bit concerned and monitoring the
situation closely but overall we do think that Slovenia will be
able to get out of the crisis without needing a bailout and so
we have a positive outlook on the bonds."
Cerar's party, formed just last month, has shot to the top
of opinion polls after decades of politically-connected lending
and mismanagement that forced the outgoing government to bail
out Slovenia's major banks last year.
Cerar supports liberalising the economy and labour market
rules, cutting red tape and selling off smaller state firms. But
he has come out against the major slated sales of Slovenia's
telecoms operator and international airport.
KBC Asset Management has been trimming its exposure to
Slovenian bonds in its European rates portfolio but remains
overweight in the country's dollar bonds, classed in the
emerging markets portfolio.
Yields on Slovenia's 10-year bonds have risen around 40
basis points over the past two weeks to 3.39 percent
, the highest since early June and clawing off record
lows of just below 3 percent.
The market is nervous over the fate of measures the outgoing
government of Alenka Bratusek agreed with its European Union
Bratusek stopped all privatisations last week, sparking
criticism from her finance minister and analysts who said the
country needs the revenue urgently after finding 3.3 billion
euros ($4.5 billion) for its banks to avert an international
QUE CERAR CERAR
Some investors are willing to give Cerar the benefit of the
doubt, saying his opposition to major privatisations could just
be a pre-election tactic.
Besides, the fact that the country's budget has already been
approved and that it is funded for next year gives investors
comfort that they will get their money back in the near term.
"We still have an overweight to Slovenia and used the
weakness ... to buy on the dips and especially because we think
Slovenia is improving if you look at the export side, it's a
healthy economy, wealthy country, people are skilled," said
Gerard Moeman, head of rates at Aegon Asset Management.
Moeman said he was more cautious about buying 10- to 15-year
bonds, preferring shorter-dated maturities but seeing scope for
further outpeformance by Slovenian bonds over core euro zone
debt such as German Bunds.
"If the elections are OK, then of course there are some
buyers and if privatisations make more progress that's a
positive sign," he said.
"As long as these positive indicators keep coming through,
then spreads will continue tightening and on a 12-month horizon
if we see the good news continuing then they could tighten
another 50 to 100 basis points."
Slovenian 10-year bonds offer investors starved of higher
returns a 220 basis point pick-up over benchmark German Bunds,
and some 50-60 bps over Spanish and Italian bonds.
Besides, its government debt at 72 percent of gross domestic
product is below the 93 percent average for the 18 euro zone
states. Countries such as Italy, Ireland, Portugal, Belgium or
Greece have debt higher than their annual economic output.
"Although the elections have halted the privatisation
process, the majority of the policies enacted by the previous
government to avert a debt crisis remain intact," said Martin
Harvey, fixed income fund manager at Threadneedle.
"Slovenia's comparatively low level of debt versus the rest
of the region continues to underpin our positive strategic
($1 = 0.7331 Euros)
(Reporting by Emelia Sithole-Matarise; Editing by Ruth