Turkey
Once constantly in crisis, Turkey’s economy in the past 18 months seems to have become stable, even predictable. “The challenge for Turkey has changed now, from crisis management to sustainable growth,” says Peter Malik, head of debt capital markets at CSFB. “It’s a question of continuing to do what they’re already doing.”
That means keeping the IMF programme on track, continuing to push the inflation rate down, maintaining fiscal discipline and putting in place the prerequisites for accession to the European Union.
But there’s more to Turkey’s economic prospects than EU aspirations.
“The strong macroeconomic fundamentals and prudent reform agenda are the most important factors for our performance ahead,” says Memduh Aslan Akcay, director-general of foreign economic relations at the Turkish treasury in Ankara.
He adds: “Once the investors evaluate Turkey as a sound credit supported by its own solid dynamics, the relative importance of the EU process will diminish.”
A Turkish success story in both 2004 and 2005 was the way the sovereign dealt with difficult issuing conditions by fulfilling two-thirds of its funding requirements in the first two months of the year.
In 2004 it issued $2.5 billion in debt via a 30-year dollar issue and a 10-year euro issue in the first two months. The 30-year deal did particularly well, coming in at a coupon of 8% at spreads of 316bp over US Treasuries.
As conditions deteriorated from April on, it did only smaller deals with shorter maturities: a $750 million seven-year deal in June and a €600 million five-year deal in September. It then issued a $1 billion 10-year bond in October, when conditions were again improving, followed by a $500 million tap in November, both of which were priced at a coupon of 7.25%. Spreads tightened from 333bps over US Treasuries to 286 bp over by the time of the tap issue.
This year, Turkey has followed the same strategy of issuing in size early. In January, it issued a $2 billion 20-year issue, which came in at a coupon of 7.38% at 282bp over US Treasuries.
Then it pushed out its euro-denominated yield curve with a 12-year €1 billion issue, lead managed by Deutsche Bank and UBS, which did very well, pricing at spreads of 224bp over Bunds, 20bp tighter than the sovereign’s 10-year euro-denominated deal 12 months earlier.
This attracted a lot of convergence funds in the wake of the green light from the EU for the opening of accession negotiations.
Tijen Taraf, director of debt capital markets at UBS, says: “Euro-denominated issues have usually been less oversubscribed than dollar benchmarks. However, the 12-year euro issue had an order book of €5.5 billion, which is a testament to Turkey’s growing euro investor base.”
The Turkish treasury’s Akcay agrees. “The emerging market investor universe has typically been more receptive to dollar issuance,” he says.
“However, recently we have been observing a growing interest from euro investors in emerging market paper as well. In the coming years, euro exposure of our total portfolio is to be increased. We will improve the liquidity of our existing bonds by targeting larger deals and we’ll build institutional franchise through targeted marketing.”
European emerging market investors already commend Turkey’s experienced debt team: “They’re top-notch in terms of investor relations, and are traditionally very market friendly,” says Raphael Kassin, emerging market fund manager at ABN Amro Asset Management.
Some convergence and emerging market investors are now looking at the sovereign’s Turkish lira-denominated debt as a way to pick up yield.
The government issued a TL2.7 billion ($2 billion) five-year issue in February, the bulk of which was sold to international investors.
Such is the demand for Turkish lira-denominated debt among foreign investors that foreign issuers are now issuing local currency bonds there at a rate of one or two a day. Issuers this year have included the European Bank for Reconstruction and Development, UBS, Depfa, Royal Bank of Scotland and the European Investment Bank.
