Barclays Sees CDS Outperformance in ’14 on Budget: Turkey Credit

Investor perceptions of Turkish sovereign risk are set for a better year in 2014, helping the nation’s credit-default swaps outperform emerging markets such as South Africa, according to Barclays Plc.

Turkey, dubbed by Morgan Stanley one of the “Fragile Five” with Brazil, Indonesia, South Africa and India, may do better because of its low budget deficit, according to London-based strategist Andreas Kolbe at Barclays Capital. The countries have been linked by investors speculating that their current-account deficits make them vulnerable should a reduction in U.S. monetary stimulus lead to capital outflows.

“Turkey’s strong fiscal position and debt dynamics should be an anchor for credit spreads,” Kolbe said by e-mail from London yesterday. “Within the group of countries deemed particularly vulnerable to less favorable global liquidity conditions, we think that Turkey is better placed than South Africa in particular.”

Credit-default swaps, which protect investors against bond losses in case of a sovereign default, climbed 71 basis points this year to 198 basis points as of today. That compares with a gain of 56 basis points to 199 for South Africa. Only Venezuela, Brazil, Ukraine and Indonesia have risen more. Swap prices rise as a country’s perceived risk increases.

Budget Deficit

While South Africa will probably run a budget deficit next year of 4.4 percent of its gross domestic product, Turkey’s deficit is set to decline to about 1.6 percent, according to economist estimates compiled by Bloomberg. It will be 2.1 percent of GDP this year, according to the median estimate of 21 economists.

Finance Minister Mehmet Simsek said on Oct. 11 that local elections in March next year and a presidential vote in August wouldn’t undermine fiscal discipline. While Turkey’s private debt is weighing on the nation’s current-account deficit, the nation’s public sector debt has fallen.

Turkey’s ratio of sovereign debt to GDP dropped to about 36 percent this year from 79 percent in 2003. It’s 59 percent in Brazil and 40 percent in South Africa, according to data compiled by Bloomberg.

Default Swaps

Credit-default swaps for the country surged in the second half of 2013, more than doubling to 246 basis points on Sept. 5 from a record low of 112 on May 8. Federal Reserve Chairman Ben S. Bernanke said May 22 he may consider reducing his bond purchases of $85 billion a month, triggering a selloff in emerging-market assets. In Turkey, anti-government protests spread nationwide in June after Istanbul police forcibly evicted demonstrators opposed to the redevelopment of a park.

Bond yields have also risen, with the rate on two-year notes at 9.09 percent yesterday, up three basis points, or 0.03 percentage point, from Dec. 11 and compared with 4.79 percent on May 17. The lira has weakened 13 percent this year against the dollar, the second-worst among 10 major currencies in eastern Europe, the Middle East and Africa, after South Africa’s rand. It fell 0.2 percent to 2.0468 per dollar at 7:16 p.m. yesterday in Istanbul.

“Turkish bonds look far more attractive than they used to,” George Kazakos, a money manager who helps oversee about $100 million in assets at Levant Partners Greece SA in Athens, said by e-mail yesterday.

Charles Robertson, chief global economist for Russian investment bank Renaissance Capital, said default swap prices could rise further should the Fed begin to taper. According to a Bloomberg survey of economists on Dec. 6, 34 percent see a start to tapering this month, and 53 percent in March.

“Turkey already saw the worst change, over June to August 2013, with credit-default swaps widening from around 140 to 240 before coming back,” Robertson said by e-mail from London yesterday. “Mild widening over 2014 as the Fed tapers, to around 240, is our base case.”

To contact the reporter on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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