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Turkey – Global markets view Turkey as investment grade

Posted on 14 February 2011

Date: 25/06/2010
Turkey – Global markets view Turkey as investment grade

Credit rating agencies insist on viewing Turkey as an economy below investment grade, but the markets do not seem to bother. Credit default swaps insuring Turkish bonds against default for five years cost 1.84 percentage points, while contracts for Russia, whose BBB rating from Standard & Poor’s is three steps higher than Turkey’s BB, trade at 1.845 percentage points. While the eurozone grapples with budget deficits, Turkey posts a huge surplus in May on surging tax revenues

Turkey is trading as an investment-grade nation in the credit-default swaps market after its dollar bonds outperformed European developing nations by the most since 2008 on accelerating economic growth.

Turkey’s debt returned 2.6 percent this quarter, compared with a 0.4 percent gain in notes sold by emerging nations from Ukraine to Poland, according to JPMorgan Chase indexes.

Credit default swaps insuring Turkish bonds against default for five years cost 184 basis points, or 1.84 percentage points, CMA DataVision prices show. Contracts for Russia, whose BBB rating from Standard & Poor’s, or S&P, is three steps higher than Turkey’s BB, trade at 184.5. Swaps on AA-rated Spain are higher at 265.

While government budget deficits widen across Europe, Turkey posted its biggest surplus in almost two years in May as tax revenue surged. The government estimates the economy grew 12 percent in the first quarter, the fastest pace in more than a decade, giving Prime Minister Recep Tayyip Erdogan room to limit spending, according to analysts at Nomura International.

“We have a very strong view on Turkish credit quality for the next six to 10 months,” Luis Costa, an emerging market strategist at Citigroup in London, said in an interview. “It’s positioning itself for an upgrade.”

Rating upgrades

Moody’s rates Turkey Ba2, two levels below investment grade, after lifting the country in January. Fitch raised its rating to BB+ in December, or one step below investment grade, while S&P boosted its ranking in February.

Sustainable public debt

Turkey’s 49 percent debt to GDP ratio last year compares with 75 percent in Portugal and 50 percent for Spain, data compiled by Bloomberg show. Russia, the world’s largest energy exporter, has a ratio of 6.9 percent.

Turkey’s GDP expanded 6 percent on an annual basis during the final three months of 2009, after four quarters of contraction. The economy may have expanded 12 percent in the first quarter as the lowest interest rates on record helped boost consumer confidence and industrial production, Finance Minister Mehmet Simsek said in Brussels on June 3. China’s economy grew 11.9 percent in the period, the fastest pace among Group of 20 industrialized nations that reported official figures.

Nomura’s emerging-market strategist in London, Olgay Büyükkayali, recommends investors buy Turkish debt. Yields on the country’s 10-year lira bonds will fall to below 9 percent from about 9.8 percent, while credit default swaps may drop 40 basis points should the country be raised to investment grade, Büyükkayali said.

A basis point on a credit default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Bonds will get a boost from “stronger fiscal policy, debt dynamics decoupling from other countries and slowing inflation,” Büyükkayali said. That “will all be supportive for more tightening of CDS spreads.”

24 June 2010 – Hurriyet (Abridged)

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