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Turkey has raised $2.5bn in its first deal on the dollar bond market since April as the country’s broad economic policy shift lures back investors who abandoned Turkish assets in recent years.
The country received more than $7bn in bids on Tuesday for a new five-year dollar-denominated sukuk, a type of debt instrument compliant with Islamic religious law, according to a term sheet seen by the Financial Times.
High demand for the deal is the latest sign of how investor sentiment is slowly improving after president Recep Tayyip Erdoğan shook up his economic team following his re-election in May and set a path to end years of unconventional economic policies.
“The government has been clawing back . . . [investors’] trust in its story,” said Stefan Weiler, JPMorgan’s head of debt capital markets for central Europe, Middle East and Africa, who worked on the deal.
He added that Turkey was able to clinch better terms than it would have several months ago because anxiety about Turkey’s economic trajectory has eased somewhat following the elections.
Turkey is also taking advantage of a recent fall in US bond yields, prompted by concerns over the state of the American economy, to lock in lower borrowing costs than would have been available several weeks ago, Weiler said.
The five-year sukuk was sold with a yield of 8.5 per cent, according to the term sheet. Turkey’s finance ministry declined to comment on the debt issuance.
The $2.5bn sukuk issuance will mean that Turkey has fulfilled its goal of raising $10bn on international capital markets this year. The previous $7.5bn was raised in conventional and green dollar bonds, but one person familiar with the deal said the sukuk helped draw in both western investors and those in the Gulf to whom Islamic finance is appealing. Turkey plans to raise another $10bn on international debt markets next year.
The deal comes at a time when the price of Turkish assets on financial markets has been improving. A conventional dollar-denominated bond maturing in October 2028 was trading with a yield of 8.1 per cent on Tuesday, compared with a peak above 10 per cent in May.
Investors are also demanding a much lower premium to hold Turkish debt. The gap in yield between Turkish five-year dollar bonds and that on US Treasuries has dropped to 3.6 percentage points from a high of nearly 7 percentage points in May, according to LSEG data.
Turkey’s new economic management team, led by finance minister Mehmet Şimşek and central bank chief Hafize Gaye Erkan, has begun unwinding many of the unorthodox economic policies pursued by Erdoğan prior to the election.
The central bank has for example, hoisted interest rates from 8.5 per cent to 35 per cent, abandoning a years-long policy of holding borrowing costs low despite extreme inflation. The government has also sharply increased taxes in a bid to cool down rampant consumer demand that had been fuelling very high imports.
Both S&P Global Ratings and Fitch Ratings increased their outlook on Turkey’s credit rating to “stable” in September as a result of the new economic policy, although it remains well within junk territory.
Many investors also remain deeply concerned over how long Turkey will stick with its new economic programme.
“Turkey is a trade, not an investment,” said Charlie Robertson, chief macro strategist at emerging markets focused fund manager FIM Partners. “Markets do like Şimşek, they don’t trust Erdoğan, and the former outweighs the latter, for now.”
The person familiar with the deal, who asked not to be named, said investors remained worried about “geopolitical risks”, especially given Erdoğan’s strong condemnation in recent weeks of Israel and its allies.
Emirates, HSBC, JPMorgan, KFH Capital, and QNB Capital are joint lead managers on the sukuk deal, according to the term sheet.
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