Turkey mandates lenders for 2026 eurobond issue amid pinkish sentiment

Turkey mandates lenders for 2026 eurobond issue amid pinkish sentiment
By Akin Nazli in Belgrade November 7, 2018

Turkey’s Ministry of Treasury and Finance has mandated BNP Paribas, HSBC and ING to issue euro-denominated bonds due in 2026, the treasury said on November 7. The bonds will be part of the government’s 2018 external borrowing programme.

Initial expectations for yields stood at around 5.5%, according to unnamed banking sources, Reuters reported citing the International Finance Review (IFR).

“Coming on the back of success of [this week’s] Kazakhstan euro issuance. But shows Turkey’s continued re-entry back on to international capital markets,” Timothy Ash of Bluebay Asset Management said in a tweet.

Turkey’s 2020-2030 dollar bonds on November 7 hit their highest level since August, as a drop in the USD following the US mid-term elections on November 6 helped extend the recent rebound in Turkey’s markets, Reuters reported. The 2030 bond got the biggest boost, rising nearly 1 cent in price in what looked set to be a fourth straight day of gains, according to the news agency.

"Shows what half decent policy can do. Unorthodox policy got them into the mess, orthodox policy is getting them out of the mess,” Ash said on Twitter on November 6.

Nothing to alter economic fundamentals’
In contrast to the trampling Turkish lira (TRY) bulls, Scott Johnson and Ziad Doud of Bloomberg Economics wrote on November 7 that the turnaround in sentiment toward Turkey’s assets since September has done nothing to alter the economic fundamentals that make it the most exposed emerging market to external shocks.

“Inflation is the highest among peers after Argentina, well above the central bank’s target, and Turkey’s projected current-account deficit is the widest. That said, though the lira has rallied since the central bank’s 625 basis-point rate hike in September and the country’s rapprochement with the US, it’s still down 30% this year meaning the shortfall should narrow in the future,” according to Bloomberg Economics.

The TRY had gained 0.48% d/d to trade at 5.3955 against the USD as of 18:20 local time on November 7.

“Given these data points, a sharp recession is all but guaranteed,” Colby Smith of the Financial Times wrote on November 6. “Further tightening, then, may not be necessary so long as Turkey's policymakers continue to toe a hawkish line. As the central bank discovered this summer, the fallout is likely to be sizeable should this commitment begin to lack credibility. Hopefully, they won't make the same mistake twice.”

The Turkish local elections will take place on March 31, 2019, according to a High Electoral Board decision published in the Official Gazette on October 26.

Moody’s: tax cuts risk rekindling TRY pressure
Turkey's latest tax cuts, which surprised markets last week, would boost consumption temporarily, but were credit negative and risked rekindling TRY pressure, Moody’s Investor Services said on November 5 in its latest credit outlook report.

“Strains in the balance of payments of some EMs last quarter seem to have been driven mainly by a decline in flows to bond markets. These flows now seem to have stabilised, but financial conditions have tightened beyond the usual suspects of Turkey and Argentina, presenting a headwind to EM growth,” Shilan Shah of Capital Economics said on November 6 in a research note, adding: “As we’ve argued before, Turkey and Argentina stood out on most measures of external vulnerability.”

“Turkey, for example, seems to have been affected by a pick-up in outflows from the banking sector… Conditions in Turkey and Argentina have tightened dramatically… Tighter financial conditions look set to push Turkey and Argentina into recession…,” Shah also said.

Last month, the treasury raised $2bn from a USD-denominated eurobond due December 2023 with a coupon rate of 7.25% and a yield to the investor of 7.50%, better than initial expectations for 7.75%.

The spread over US bonds reached 447.5bp at the auction, marking a jump from 336.8bp in the April auction and 266.7bp in the January auction.

So far this year, Turkey has raised a total of $6bn from international markets while it plans $6.5bn worth of eurobond issues in all across 2018. The government, meanwhile, plans to borrow $8bn on international markets in 2019.

In April, the Treasury issued $2bn worth of 10-year eurobonds at an annual cost of 6.20% against three-times-higher demand.

In January, the Treasury raised $2bn via 10-year bonds but at the lower cost of 5.20%.