Turkey Converging With BRICs on Cheapest to China Default Swaps

Turkey Converging With BRICs
Traffic travels along Ataturk avenue in Ankara. Photographer: Kerem Uzel/Bloomberg

Turkey is converging with the BRIC nations in the credit market as the country’s economic rebound sends the cost of insuring debt against default to the lowest in at least a year compared with Brazil, Russia, India and China.

The difference in the cost of five-year credit-default swaps on Turkey’s junk-rated bonds narrowed to 70 basis points above China yesterday, within 10 basis points of the all-time low reached on Nov. 4, and was the cheapest in 19 months compared with Brazil at a gap of 22 basis points last week, according to prices from CMA, a data provider. Moody’s Investors Service and Fitch Ratings lifted their outlook for Turkey to positive in the past two months.

“Turkey and China are very different countries, but this decline in perceived risk is the result of a degree of outperformance” through the global credit crisis, Erkin Isik, an economist at Fortis Bank AS in Istanbul, said in a phone interview. Turkey “was hit by the crisis but less than others, and it’s emerging relatively better as a result,” he said.

Investors are becoming more confident in Turkey as its economy grows at the second fastest pace in the Group of 20 major economies after China and record-low interest rates help spur local consumer demand. Prime Minister Recep Tayyip Erdogan, who has completed two stand-by loan agreements with the International Monetary Fund since his government came to office in 2002, broke off talks with the IMF in March as the country no longer needed a loan.

Turkey swaps fell 21 basis points below Russia on Nov. 29, the lowest in a year, and are 37 lower than the State Bank of India, both of which have better credit ratings.

Debt Reduction

Turkey’s government plans to reduce public debt to 42.3 percent of gross domestic product this year, 40.6 percent next year and 38.8 percent in 2012, and bring the budget deficit down to 2.8 percent next year from 4 percent this year.

Turkey’s GDP grew an annual 10.3 percent in the second quarter, matching China’s as the fastest expansion the period among G-20 economies.

Moody’s raised its outlook to positive from stable on Turkey’s rating of Ba2, two steps below investment grade, citing improvements in the economy and the country’s debt management. Fitch Ratings lifted its ranking in December last year to BB+, one step short of investment grade, and switched the outlook to positive from stable last month.

“The market has now priced in that Turkey will soon get upgraded to investment-grade status,” said Arko Sen, a debt and foreign-exchange strategist for emerging Europe, the Middle East and Africa at Bank of America Corp.’s Merrill Lynch in London. “We think that’s something that’s likely to happen as well, potentially towards the end of 2011.”

China, Brazil

China, with the fourth-highest investment-grade ranking of Aa3 by Moody’s and fifth-highest from Fitch at A+, released third-quarter GDP of 9.6 percent last month. Turkey will post third-quarter figures Dec. 10.

Credit-default swaps on Turkey dropped to 139 basis points yesterday from 183 at the start of the year and as high as 849 in October 2008. The gap over Brazil was 29 basis points yesterday, down from 60 in January and 290 in October 2008, according to data compiled by Bloomberg.

The contracts, which fall in price as perceptions of creditworthiness improve, pay the buyer face value in exchange for the underlying securities or the cash equivalent should the borrower fail to adhere to its debt agreements. A basis point is 0.01 percentage point.

Debt Explosion

Investment-grade ratings for Turkey would probably reduce the gap with Brazil swaps to zero, said Merrill’s Sen.

“China and Brazil and Turkey are all in a bucket of countries where debt-to-GDP is the same or declining,” while in other places debt it’s “exploding,” Inan Demir, chief economist at Finansbank AS, said in a telephone interview.

Turkey swaps fell to 19 basis points below Russia from 255 basis points higher in June 2006. Russia is ranked two levels above junk by Fitch and S&P at BBB and three steps higher by Moody’s at Baa1.

The contracts for Turkey are 6 basis points from the lowest point in 19 months compared with the State Bank of India, which is rated Ba1 by Moody’s, the highest junk rating, and BBB- by S&P, its lowest investment-grade ranking. The difference is 6 basis points from the year high of 43 in August.

“Good things are happening in terms of Turkish fundamentals, the strength of the banking system, the strong fiscal performance this year, the generalized investor comfort with Turkey, its high resilience to external jitters,” said Paul Biszko, emerging-market strategist at Royal Bank of Canada in Toronto.

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