Turkey hires banks to advise on dollar-denominated bond

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Turkey has hired a trio of banks to advise on a new dollar-denominated bond issuance, underscoring the government’s confidence despite a deep rout in the lira.

Goldman Sachs, HSBC and JPMorgan have been mandated for paper that will mature in October 2028, the Undersecretariat Of Treasury said on its website.

The decision comes even as investors have become increasingly anxious over Turkish assets given its rising sensitivity to external shocks. In a sign of the concern, the lira has tumbled 7.7 per cent on the dollar this year, hitting a record low last week.

In fixed income, Turkey’s 10-year US-dollar denominated bond issued in January has also faced selling pressure. The spread against a comparable US Treasury has risen to 3.14 percentage points, from 2.67 percentage points at issue, according to Reuters data.

Moody’s, which reduced Turkey’s credit rating in March to Ba2 from Ba1, pointed out on Monday that the lira’s sharp drop is “credit negative”.

“Ongoing lira weakness is especially problematic for Turkey’s economy because of its high degree of external vulnerability and low foreign-exchange reserves, a credit negative for the sovereign,” the ratings service said.

Turkey’s economy is growing rapidly, with gross domestic product expanding more than 7 per cent last year. But it has come at the cost of double-digit inflation and a rising current account deficit.

In fact, Moody’s points out that its barometer of external vulnerability is “above 200 per cent and climbing.” Its benchmark for emerging market borrowers is 100 per cent or lower “because they are subject to market volatility and sudden stops of external financing, especially when, like Turkey, domestic and geopolitical risks are high.”

The buoyant inflation and weakening currency have prompted intense speculation regarding the Turkish central bank’s policy decision, due on April 25.

Goldman Sachs reckons rates will need to rise by 2.5 percentage points to 4.3 percentage points overall for inflation to return to target levels.

“With growth strong and terms of trade moving against Turkey, the current account deficit is once again widening, while the quality of the financing is deteriorating,” the investment bank said.

Turkish government officials helped steady sentiment last week by indicating they were prepared to take action on the weakening exchange rate. But Moody’s points out that “the lira is susceptible to renewed pressure if the authorities delay in following up these statements with interest rate hikes”.

“This tense situation is an important test of the delicate balance between Turkey’s fundamental strength from its dynamic economy and very strong fiscal metrics — and its high and rising external vulnerability”, Moody’s said.



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