Erdogan Turmoil Risks Spoiling Dollar Bond Moment: Turkey CreditSelcuk Gokoluk
Conditions in Turkey are the most favorable in four years for selling dollar-denominated debt, so long as the lira’s yearlong slump doesn’t worsen.
The discount for selling two-year notes in dollars versus lira reached 7.89 percentage points Jan. 6, the most since July 2009. Turkey’s currency fell 17 percent against the dollar last year and a further 2.4 percent in 2014, increasing the cost of foreign-debt payments. Prime Minister Recep Tayyip Erdogan may have to pay an extra 1.1 billion lira ($500 million) servicing its outstanding dollar debt this year, based on the lira’s decline from the end of 2012.
Nations including Poland, Romania and Slovakia have tapped the Eurobond market this year, locking in borrowing costs before the Federal Reserve trims its monetary stimulus further. Developing nations sold $44 billion of foreign-currency bonds in the first 15 days of 2014, up 16 percent on 2013 and the best start to a year since Bloomberg records began in 1999. Turkey plans to sell $6.5 billion of foreign-currency debt this year.
“Turkey has outstanding debt denominated in U.S. dollars and to refinance everything in lira is tantamount to a potentially massive currency bet,” Zsolt Papp, who helps oversee $2.6 billion of emerging-market debt at Union Bancaire Privee in Zurich, wrote in e-mailed comments. “Placing a dollar bond now could also be perceived as a sign of confidence.”
Turkey had $39.5 billion of outstanding conventional dollar bonds yesterday with coupon payments of $2.74 billion due in the coming 12 months, according to data compiled by Bloomberg. That would have cost the government 4.9 billion lira at the beginning of 2013 and 6 billion lira yesterday based on exchange-rate changes. The government had total borrowings of 405 billion lira at the end of November, central bank data show.
The lira fell to a record 2.2124 per dollar today. It will weaken to 2.31 per dollar in the first quarter and to 2.42 by June amid a corruption probe that has ensnared the government, according to Przemyslaw Kwiecien, the chief economist at X-Trade Broker Dom Maklerski SA in Warsaw, the currency’s most accurate forecaster in the fourth quarter. The Bloomberg forward curve shows it at 2.37 per dollar in the fourth quarter.
The lira depreciated 0.6 percent to 2.2042 per dollar at 4:23 p.m. in Istanbul.
Foreign-investor holdings of Turkish debt dropped to $50.4 billion in the week ended Jan. 10, according to central bank data today. That’s down from $71.8 billion in the period ended May 10, the data show.
The Fed signaled in May it could start tapering its $85 billion a month of bond purchases, a process it began with a $10 billion reduction announced at its December meeting.
The drop in Turkish assets gathered pace after a corruption probe targeting the government became public Dec. 17, leading to the resignation of three ministers and the arrest of the chief executive officer of a state-owned bank. Erdogan retaliated by removing and reassigning hundreds of police officers across Istanbul and the capital Ankara, accusing those behind the investigation of an attempted coup.
The 10-year dollar bond sold by Turkey Jan. 8, 2013, at 3.47 percent yielded 5.49 percent yesterday. The rate on similar-maturity lira bonds reached a more than three-year high 10.36 percent Dec. 27 after starting the year at 6.56 percent.
“Turkey is prepared to swallow higher costs for what it considers more important goals of being seen as a regular issuer, creating benchmarks and feeding the central bank’s coffers,” Tim Ash, the chief emerging-markets economist at Standard Bank Group Ltd. in London, said in a telephone interview yesterday. “Turkey has committed to go to market with a similar amount of foreign-currency debt every year and there’s very little that will put them off.”
Poland raised 2 billion euros ($2.7 billion) in an offering of January 2024 bonds priced to yield 3.032 percent on Jan. 8, according to data compiled by Bloomberg, and hired banks today to sell similar maturity dollar bonds. Slovakia sold 1.5 billion euros of January 2029 securities at a yield of 3.655 percent last week.
“In this climate definitely U.S. dollar” debt should be preferred to lira debt, Lutz Roehmeyer, who manages $1 billion at Berlin-based Landesbank Berlin AG, said by e-mail yesterday. “There is more liquidity and more capital waiting to be invested. So dollar funding is cheaper right now.”