Turkey - Turkey recovers lost ground

  • 16 Jan 2004
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Turkey’s standing in the international debt markets soared in 2003. This year, progress with EU membership and its IMF programme will prove essential.  Kathryn Wells reports.

Just over one year ago in November 2002, Turkey’s Justice and Development Party  swept to power, winning control of nearly two-thirds of parliamentary seats and enabling Prime Minister Recep Tayyip Erdogan to form the first non-coalition government for years.

The full effects of the unprecedented political stability this created were felt in the financial markets in 2003.

Melih Nemli, acting director general of the Treasury’s department for foreign economic relations, explains Turkey’s bond market strategy in 2003 and outlines the plans for 2004.

How have funding conditions been for Turkey in 2003?
MN: This has been a turbulent year, owing to rapidly changing market conditions and volatility caused by market fundamentals. The first two quarters were under pressure of war in the region, which caused bond yields to fluctuate greatly.

During this turmoil, Turkey was able to accomplish three new issuances — two new transactions and one re-opening — by being proactive and pursuing a front-loaded funding programme.

Do you plan to look beyond the dollar and euro markets next year?
Our targeted markets in 2004 are likely to remain the same as in 2003, as the recovery in Japan pales in comparison with that of the US and European markets.

What are Turkey’s main challenges to continue winning rating upgrades from the rating agencies?
Following the recent upgrades from various rating agencies, the key challenges ahead are the high domestic debt overhang and the need to continue with structural reforms in the economy.

Since early 2002, Turkey has experienced considerable progress in addressing negative debt dynamics. The virtuous fiscal cycle and appreciation of the domestic currency enabled Turkey to sustain a moderate net debt to GDP ratio of around 70%.

On the other hand, the structural reform agenda poses a significant challenge, as international investors are eager to see these developments.

What impact will further upgrades have on your borrowing strategy?
The likelihood of prospective upgrades will definitely impact on our funding plans, as it will open new windows of opportunity to extend our yield curves and lock in low funding costs. Assuming favourable market sentiment continues to prevail, funding objectives for 2004 should be easily attainable.
This interview was conducted in December.

Even though the war in Iraq closed markets to Turkey for much of the first half of the year, the sovereign had completed its external funding requirements for 2003 by September, and was able to go some way towards pre-funding for 2004.

“Turkey has been the greatest success story of all the EMEA [Europe, the Middle East and Africa] region’s sovereigns in 2003 and has reached all-time highs,” says Peter Malik, head of emerging markets origination at Credit Suisse First Boston in London. “The fact that there have been no political crises means that investors can evaluate Turkey on its fundamentals.”

This is in marked contrast to recent uncertainty. Petri Kivinen, head of emerging markets origination at Dresdner Kleinwort Wasserstein in London, notes with understatement that Turkey’s borrowing opportunities have been “somewhat restricted” in recent years. Last year, he says, “against all odds with the war in Iraq, its chances came much more readily and so the treasury was able to focus on extending maturity and bringing strategic issues.”

Before the first US missiles hit Baghdad on March 20, Turkey had already issued more than $1.5bn of bonds. “Turkey did a fantastic job of getting in the market early,” says Jonathan Brown, head of emerging market syndicate at JP Morgan in London. “During Iraq, its spreads went as high as 1,000bp over Treasuries before tightening back in.”

Similarly, Turkey was able to return to the markets just a fortnight after US President George W Bush declared war officially over on May 1, bringing a $750m tap of its 2013 9.875% bond.

Fitch downgraded Turkey’s B rating in March but then restored it in September, with a positive outlook. In October, Standard & Poor’s raised its rating to B+, bringing it into line with Moody’s B1 score.

As in recent years, Turkey concentrated its borrowing in the dollar markets, raising more than 75% of its $5.4bn of funding there. “Turkey always has good opportunities in dollars,” says Brown. “While both markets [dollars and euros] have support from local Turkish investors, this is doubly true of the dollar market. The key for Turkey to get bigger euro deals is not on the macro side, but on furthering the EU accession process.”

Investment bankers hope Europe’s retail investors are rediscovering their enthusiasm for Turkish bonds. “Turkey will be able to do more of its issuance in euros in 2004 and bring longer dated euro issues, having already extended its euro yield curve in 2003,” says Alexis Plan, head of emerging market syndicate at Commerzbank in Frankfurt. “Hopefully the traditionally strong retail base will return for Turkey, having been badly hit by the crisis in Argentina.”

Turkey must raise around $4.5bn in 2004, although it had pre-funded around $750m of this by the end of 2003.

But given the country’s historical difficulties in accessing the market, bankers expect it to act opportunistically if conditions remain suitable and issue up to $6bn.

Turkish banks and companies, absent from the bond market since the November 2000-February 2001 financial crisis, could also return.

“Turkey should see a lot of upside, as it has shown a real improvement in its fundamentals,” says Nabil Menai, co-head of emerging markets origination at Merrill Lynch in London. “We may well see some corporate and financial institution names able to return to market.” Companies such as Vestel, the electronics manufacturer, media group Dogan and mobile phone operator Turkcell are the most likely to issue.

“Turkey’s stars seem to be aligned on the macro side, and geopolitically its relationship with the US seems better,” says Dennis Holtzapffel, head of emerging market syndicate at UBS in London. “The key political issue going forward will be getting the EU accession process moving.”

Malik at CSFB agrees. “If Turkey is given a date for accession, no matter how far off, then its bonds will fly and it will finally be able to decouple from countries such as Brazil and Venezuela,” he says. 

  • 16 Jan 2004

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 29,333.03 101 7.94%
2 JPMorgan 27,208.83 91 7.37%
3 Barclays 23,714.00 55 6.42%
4 Bank of America Merrill Lynch 20,332.10 65 5.50%
5 Goldman Sachs 20,005.21 49 5.42%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Mizuho 299.85 1 21.73%
1 ING 299.85 1 21.73%
1 Commerzbank Group 299.85 1 21.73%
1 BNP Paribas 299.85 1 21.73%
5 UBS 60.22 1 4.36%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 1,607.28 5 23.03%
2 Credit Suisse 1,301.65 4 18.65%
3 UBS 970.80 3 13.91%
4 BNP Paribas 522.35 4 7.49%
5 SG Corporate & Investment Banking 444.17 3 6.37%