Erdogan Confidence Means Lower Samurai Yields Than Uruguay: Turkey Credit

Japanese investors are poised to provide Turkey with its lowest borrowing costs as confidence in the nation’s economic outlook improves.

Turkey is offering $1 billion of 10-year Samurai notes at a yield between 35 and 45 basis points above the benchmark yen swap rate, said a person with direct knowledge who declined to be identified. At current rates, the yield would be no higher than 1.44 percent, compared with 1.87 percent when Turkey tapped Japanese investors last March and 5.75 percent on dollar bonds sold Feb. 8, data compiled by Bloomberg show. Uruguay, rated a level higher than Turkey by Moody’s Investors Service, paid 1.64 percent on a 10-year Samurai in May.

Prime Minister Recep Tayyip Erdogan, 58, is taking advantage of resurgent confidence in the world’s second-fastest growing major economy after the central bank reduced interest rates twice this year. While Asahi Life Asset Management Co. Ltd., a unit of Japan’s second oldest insurer, said it won’t buy the notes because the yield is too low, demand for emerging market assets will help the sale, according to ING Groep NV.

“A tight spread for Turkey is justified if you look at the fundamentals on the fiscal side,” Simon Quijano-Evans, an economist at ING in London, said by phone on Feb. 24. “It wouldn’t surprise me to see the spreads falling even further over the next 12 months as the fiscal dynamics are among the best in the emerging markets universe.”

Narrower Deficit

Turkey’s economy expanded 9.6 percent in the first nine months of last year, second only to China among the Group of 20 nations. Rising gross domestic product helped Turkey reduce its budget deficit to 1.4 percent of GDP last year from 3.6 percent in 2010. Erdogan is targeting a gap of 1.5 percent of output this year, compared with an average 2.7 percent shortfall for developing countries monitored by the International Monetary Fund.

The country’s growth outlook has improved since the central bank resumed lending to banks at the lower of its two main rates at 5.75 percent since Jan. 6. It also cut its maximum rate to 11.5 percent from 12.5 percent on Feb. 21. Goldman Sachs Group Inc. boosted its forecast for 2012 economic growth to 2.5 percent from 0.8 percent on Feb. 10.

The Samurai sale is “well timed,” David Hauner, head of emerging Europe strategy at Bank of America Merrill Lynch in London, said in a phone interview on Feb. 24. “Over the course of the past two months, Turkey has experienced a certain amount of catch up in external debt as well as in local markets.”

The yield on Turkey’s dollar bonds, which was the same as the average for emerging markets on Jan. 6, dropped 26 basis points below, or 0.26 percentage point, on Feb. 24, according to JPMorgan Chase & Co. (JPM)’s Global EMBI Indexes.

‘Risk-Off’

While Turkey’s budget deficit has shrunk, the shortfall on the current account surged to more than 10 percent of GDP last year. Its reliance on foreign funding to cover the deficit leaves Turkey “particularly susceptible to potential risk-off sentiment,” Morgan Stanley analysts including Marianna Kozintseva in London said in an e-mailed report on Feb. 23.

The vulnerability of the economy makes the yield on its Samurai offering too low, according to Yoshihiro Nakatani at Asahi Life Asset Management Co.

“Turkey is familiar to Japanese investors but I think this time the issue is not a good deal,” Nakatani, a Tokyo-based senior fund manager who helps oversee about $1 billion at Asahi, said in a phone interview on Feb. 24. “This bond spread is not attractive.”

Default Swaps

The cost of protecting Turkish bonds against default using five-year credit-default swaps rose six basis points to 248 basis points today, higher than the spread of 195 for Russia, which is rated three levels higher by Standard & Poor’s, and 203 for Poland, rated five levels higher, according to CMA, which is owned by CME Group Inc. (CME) and compiles prices quoted by dealers in the privately-negotiated market.

Turkish contracts cost 34 basis points less than the average for countries in central and eastern Europe, the Middle East and Africa included in the Markit iTraxx SovX CEEMEA Index. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Moody’s Investors Service rates Turkey Ba2, two steps below investment grade, with a “positive” outlook. S&P also rates Turkey at two levels below investment grade at BB. Fitch rates Turkey one level below investment.

Yields on two-year benchmark bonds in liras rose 17 basis points to 9.35 percent by 1:39 p.m. in Istanbul, the highest intra-day level since Feb. 16. The lira declined 0.4 percent to 1.7738 per dollar.

Borrowing Plans

The Samurai sale is part of a foreign borrowing program to raise 9.5 billion liras ($5.4 billion) this year. The government sold $1 billion of dollar bonds due 2022 at a yield of 5.75 percent on Feb. 8, three weeks after issuing $1.5 billion of the same debt at 6.35 percent, data compiled by Bloomberg show. The yield has since fallen to 5.37 percent.

The Samurai bonds will be guaranteed by the Japan Bank for International Cooperation, said the person with knowledge of the deal, asking not to be identified as the information is private. The same bank guaranteed Turkey’s last sale Samurai debt as well as Uruguay’s securities.

The offering in yen reflects the growing importance of Turkey’s trade with non-western partners, according to Quijano- Evans. The European Union’s share of Turkish exports fell to 42 percent in December 2011 from 45 percent a year earlier, according to the statistics office’s website.

“It’s important for Turkey to look into a new investor base,” he said. “Over the last couple of years what Turkey has done is move more towards Asia.”

To contact the reporter on this story: Jason Webb in London at jwebb25@bloomberg.net.

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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