Even by CEEMEA standards the Turkish sovereign has had a tough year. The government’s ham-fisted response to public protests was splashed across front pages worldwide. Then the country’s local and international bond yields were yanked upwards as investors fled a rapidly failing EM rally. Its worrying current account deficit and fiscal failings were laid bare, as was its reliance on capital markets inflows to cover shortfalls. The lira suffered, hitting record lows against the dollar — and then suffered some more.
But now the pressure has eased. Military intervention in Syria looks less likely, at least in the short term, while imminent clarity over the Federal Reserve’s tapering plan looks more so. CEEMEA debt is rallying as investors start to see value after weeks of outflows and a more stable market has given them the confidence to buy.
EM bond fund flows were positive last Friday, according to data provider EPFR — the first positive day in almost a month. The lira has surged against the dollar and Turkey’s Eurobonds have traded up more than five cash points in less than two weeks.
At the same time, other struggling sovereigns have demonstrated that there is ample demand for their fixed income debt. Indonesia has posted record high monthly trade deficits this year, its currency has lost a large chunk of its value and, like Turkey, its stock markets have fallen and its bond yields have risen.
But its $1.5bn 10 year sukuk on September 10 was a clear success, as was South Africa’s $2bn 12 year bond a day earlier. Romania rounded off its external borrowing needs for 2013 with a €1.5bn deal on Thursday.
The time is right for Turkey to do the same. The sovereign has $2bn left to do this year and its borrowing costs have dropped sharply in the last month. The levels on offer will not be what Turkey had hoped for in the carefree days of spring, but with underlying rates rising they probably never will be now. Better to show the market it can still attract investors and cover the current account deficit with capital market money.
Done right, a deal should push down borrowing costs for future funding plans and help open the market for the country’s corporate and financials. Several Russian borrowers mandated shortly after their sovereign demonstrated recently that a decent new issue premium was nothing to be ashamed of.
The last Turkish deal was Mersin Port of Turkey’s $450m in July, which was partly supported by the European Bank for Reconstruction and Development. A solid deal from the Turkish sovereign would make it much easier for corporate and financial supply to restart.
And there are signs Turkish issuers have already noticed conditions are much improved. Coca-Cola Içecek has picked banks for a Eurobond. The sovereign should take advantage of the same window that its companies are already eyeing.