Thursday, 19 July 2018

IMF/World Bank 2007: Turkey passes test

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Turkey’s parliamentary and presidential elections have been and gone without causing much market distress as investors take comfort from the continuation of the ruling AK party’s reform programme. This should help ensure the Treasury's 2007 financing needs are easily met, writes John Weavers.

Thus far Turkish markets have survived the “year of elections” in relatively good shape, in spite of sporadic military rumblings about the selection of former Islamist Abdullah Gul as the new head of state. The ruling AK party’s convincing victory in June’s early parliamentary elections emboldened it sufficiently to re-nominate its preferred presidential candidate against the armed forces’ wishes while its retained grip on power provides comfort to investors anxious that the reform process continues.

Turkey lacks the commodity riches that benefited other EM countries so much during the global economic boom (notably Russia and Latin America) but it still managed to hold up well during the July/August EM sell-off. Turkey five-year CDS climbed from 62bp at the end of June to 207bp in early September while similarly rated Ukraine, which benefits from a total government debt level of less than 20%, widened 72bp in that time, also to 207bp.

The Turkish economy and growing market maturity bodes well for possible upgrades by the end of the year or early next, despite a record current account deficit and still hefty issuance schedule. Indeed, Kazakh banks have taken over from Turkey as the first port of call for sellers during EM's sporadic struggles.

Much work still needs to be done, however, with pre-election spending and disappointing tax returns raising doubts about the government’s fiscal forecasts, though a decisive new electoral mandate fortifies the government which should be able to take the required fiscal steps to satisfy the IMF. This should ensure Turkey completes its 2007 Eurobond programme without too many hiccups as it enjoys increased scarcity value as the stalwart issuer within the shrinking EM sovereign space. Several Latin American sovereigns have used their commodity wealth to carry out Eurobond buybacks and repay IMF loans

Given its low commodity output Turkey is in no position to follow the Latin American model and in terms of total issuance US$5bn–$5.5bn is likely to remain Turkey’s annual Eurobond figure for coming years, according to the Treasury.

Ankara is pleased with its issuance strategy to date, in particular the success of the first five-year lira linker auction which offers another source of financing. Meanwhile, the Treasury was at the time of writing contemplating a fourth Eurobond visit of 2007 having completed US$3.35bn of this year's US$5.5bn foreign currency issuance target.

2007 started off in disappointing fashion as the sovereign raised US$500m from each tap of outstanding 7.0% 2016s and 6.875% 2036s on January 9, with both deals priced below initial guidance as market conditions deteriorated. The additions' fixed reoffer prices of 101.875 and 95.875 were 1/8 and 1/4 less than initial price talk, providing yields of 6.732% and 7.215%, equivalent to 207bp and 247bp over US Treasuries. Expectations had centred on bumper supply of US$1.5bn–$2bn.

But Turkey got its issuance strategy back on track later in January with an above expectations €1.25bn 12-year Eurobond that was the country's second-largest deal and biggest non-dollar issue. The Reg S issue pays a 5.875% coupon and was priced at 99.106 to yield 5.977%, equivalent to 168bp over mid-swaps and 193.4bp over Bunds.

The Treasury made its third visit with February's US$750m addition to the existing 2020s which took that issue's size up to US$2bn. The bond pays a 7.0% coupon that with a tap price of 100.95 yielded 6.888%, 2bp inside initial guidance of 220bp over 10-year Treasuries.

Since then Turkey has missed a couple of windows as it continues to monitor the markets on a daily basis with US$2.15bn still to raise plus some traditional pre-financing for next year. "This [US$2.15bn] only represents one and a half visits to the market and is easily doable in the timeframe. The main question for the Treasury is whether to come quickly with a modest tap or bide its time until the market revives and then go for a new blow-out benchmark," said one syndication manager

The Treasury is also putting a lot of emphasis on its investor relations programme. The office was established in 2005, and there are around 1,000 investors on the regular mailing list. In terms of new areas of demand, Italy was a good source of interest for the latest euro issue; Scandinavia, especially retail investors from Denmark, is proving interesting, and there is also interest from investor bases as different as Austria and Brazil.

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