Turkey is currently enjoying lower borrowing costs and benefitting from a stable domestic financial sector, which showed itself to be far more resilient to the external shocks than in the past. Although Turkish bonds are seeing an increase in investment demand, risk aversion continues to be the main theme in the markets.
While some of its neighbours, most notably Greece, have seen their bond ratings downgraded to junk status of late, Turkey’s standing in international finance markets has been steadily climbing, with ratings agencies Fitch, Standard & Poor’s, and Moody’s all upgrading Turkish bonds to just below investment grade in recent months.
These improved ratings have been justified by price action in the bond and credit default swap markets over the past two years compared to developing European countries and even developed states such as Spain.
Olgay Buyukkayali, a London-based emerging markets analyst with securities house Nomura International, suggests that Turkish debt is a good buy for investors. Turkish bonds will be bolstered by a stronger fiscal policy, a decoupling of debt dynamics from other countries and a continued slowdown of inflation, Buyukkayali told the Bloomberg news agency in late June.
Investors could soon be given another chance to test how good a buy Turkish bonds will be, following on from a $1.8bn euro-denominated international bond earlier this year. According to Emre Balibek, the Treasury’s deputy general director in public finance, Turkey could float a yen-denominated bond as part of its programme to diversify its foreign currency debt financing.
“We are looking at yen – it could be in the Japanese market, it could be in the international market,” he said in an interview with the Reuters news agency on June 23.
While looking to widen the foreign customer base of its state bonds, Turkey is increasingly focusing on domestic borrowing to meet its requirements, Balibek said.
“Our main strategy is to meet funding requirements with local currency – we have substantially reduced FX borrowing,” he said.
As if on cue, the central bank announced on June 24 that it was planning to buy government bonds valued at $1.9bn over the rest of the year, including $126m worth of the benchmark bond in two auctions by the end of June. Although this move appears to be following the bond purchasing programmes implemented by the Bank of England, the US Fed and most recently the ECB, it is not expected to amount to so-called quantitative easing (QE). The central bank informed OBG that the bond purchases are conducted to replace the existing bond portfolio used for repo operations. The overall size of the bonds on the banks’ balance sheet will remain largely the same, according to officials. This should appease market-watchers who are concerned that monetising government debt could result in inflation further down the road.
This move into the domestic money market has in part been driven by the increasing stability in the local economy over the past few years, and in particular the sharp decline in interest rates over the past 12 months. The central bank slashed 10.25% off Turkey’s key interest rates over a 13-month period starting from November 2008, and has since left its benchmark rates at near record lows since the beginning of this year. At the most recent meeting of the bank’s monetary policy committee, held on June 17, the reserve again decided against any increase in its one-week repo lending rate of 7%, prompted by continuing moderate inflation and concerns over the economic health of Europe.
It is not just the state that is eyeing bonds – the private sector too is looking to raise funds on the capital market to support business activities, though at least in the case of Turkish banks, there are a few hurdles that have to be addressed first.
The Banking Regulation and Supervision Agency (BRSA), the independent agency tasked with regulating Turkey’s financial sector, is moving to further open up the bond market, announcing plans to let private banks issue local lira-denominated bonds, having previously barred lenders from using the bond market to raise funds domestically.
A full set of criteria and requirements for banks to enter the local bond market will be issued before the end of the year, according to BRSA chief Tevfik Bilgin. However, each proposed bond issue will be judged on a case-by-case basis, he told news agency Bloomberg in mid-June.
“Not every bank is the same and we need to set objective criteria to test each one and set an amount,” Bilgin said.
Earlier this year, the BRSA rejected applications by two of Turkey’s largest lenders, Finansbank and Akbank, to conduct bond sales on the grounds that the international financial climate was too uncertain and that high-level borrowing by banks could have a negative impact on debt sales by the Treasury and industrial firms.
In late March, the BRSA blocked a proposed $650m bond issue by Finansbank, which is owned by National Bank of Greece, saying that it was not approving the sale of asset-backed debt instruments and bonds by commercial and Islamic banks.
Though Turkish bonds are appealing, the country is not immune to spillover effects from the European economy, which represents Turkey’s largest export market.
While Turkey is taking precautions to protect itself from any fallout from the European debt crisis, there was still the potential that the woes afflicting the eurozone could spill over to Turkey, said Ibrahim Turhan, the central bank’s deputy governor.
“In 2008 the epicentre of the crisis was the US, and it turned into a global phenomenon. This time the epicentre is Europe but there is a risk of this becoming a global problem,” he told the Dow Jones news agency on June 9.
Though it is still unclear how deep the mire that some European countries have slipped into really is, Turkish capital markets are hopeful that they can ride out this latest storm, having successfully skirted the foul weather the last time around.
