By Philip Alexander and Joanne O'Connor
Turkey has often found itself near the front of the firing line when global market turmoil hits. In a sense, this time is no different. When credit markets plunged this year, S&P responded by creating an index to measure sovereign vulnerability to liquidity shortage. Turkey was near the top of the list, with only Latvia and Bulgaria more at risk. The Liquidity Vulnerability Index, a measure designed for the EMEA region, takes into account factors such as external financing and debt rollover needs, the share of the current account deficit financed by foreign direct investment, and real exchange rate appreciation in 2007.
At the central bank, governor DurmusYilmaz acknowledges that the high current account deficit “could be an excuse for foreign investors to sell Turkish assets”, but he argues that hot money financing now accounts for only 10% of the total. Moreover, thanks to the vigorous response from the central bank and banking regulator BRSA to the 2000-01 financial crisis, Turkish banks look less exposed today than their developed-economy counterparts.
“The Basel capital adequacy requirement is 8%, but in Turkey we have set the minimum at 12%, and the actual ratio for the banking sector is almost 20%, so we are much stronger than ever before,” he says. The central bank calculates the sector’s open foreign exchange positions at less than $1 billion, with $6.5 billion total balance sheet FX exposure, and risk management systems in line with international practices.
As to the government’s ability to roll over maturing obligations in more difficult market conditions, Treasury under-secretary Ibrahim Canakci points out that foreign currency yields on Turkish government bonds have widened much less than during the mid-2006 sell-off. Local yields have even tightened, following the central bank’s 25 basis point rate cut in September. “Besides, we do not have huge redemptions during the rest of 2007. We have implemented a front-loaded borrowing strategy both for external and domestic borrowing.”
The sovereign’s external borrowing target for 2007 is $5.5 billion, of which $3.4 billion was secured in the first two months of the year. A 10-year Eurobond issue in late September was three times oversubscribed, reopening international markets for Turkey. “Similarly, our domestic debt rollover target for 2007 is 74.2%, and so far it has been at 82.0%,” adds Canakci.
The lira also recovered very rapidly, reaching its strongest level for the year in September, but further market volatility and a fall in exports to a slowing US economy could still cause fresh weakness. However, Canakci emphasizes that the Treasury’s debt servicing costs are far less vulnerable to exchange rate moves than in the past. Hard currency net public debt has been reduced from a peak of $79 billion in 2004 to $20.9 billion as at the first quarter of 2007. “With reduced FX risk, our sensitivity analysis tells us that a 10% real depreciation of the Turkish lira would increase the net public debt-to-GDP ratio by only 0.8 percentage points, compared to 6.3 percentage points in 2001,” says Canakci.
For more analysis on Turkey's prospects in 2008, please see "Second life for AKP in Turkey"