The Daily Update - Fed Turkey sandwich

The futures market has now priced a Fed tightening at 100% and tomorrow we will have the release of November’s Fed minutes which are expected to reflect recent comments from the central bank members that a hike is coming at the December 13-14 meeting. Stock markets are up again and so are metals and oil as the likelihood of some sort of OPEC agreement on production becomes more possible, with positive comments from both Iran and Iraq ahead of next week’s meeting in Vienna.

However, one place that is not having a great time is Turkey, (bearing in mind this Thursday is US Thanksgiving and Americans will consume about 46 million Turkey’s according to the US National Turkey Federation). Since the US Presidential election the Turkish lira has fallen 10% against the US dollar as foreign investors have withdrawn over $2bn so far this quarter. According to the IMF a further 10% fall, which is quite likely according to many observers, will push corporate leverage up to the 200% mark from the current 165%, as 40% of all loans are in non-lira denominated structures.

Turkish banks have huge books of corporate loans as seen at Isbank 73% and Halkbank 77% and with GDP in Turkey under immense pressure from the strong US dollar the banks are of major concern. Turkish non-financial corporate debt has grown more than threefold over the last six years up to $402bn in August, with the foreign currency element rising to $201bn equivalent in July which equates to about a third of Turkey's overall GDP, up from 12% in 2010. Bloomberg estimates that around $53bn of all syndicated loans in Turkey are denominated in US dollars, which has since the end of 2014 moved up by over 25% against the Turkish lira.

According to a presentation by Garanti Bank based on Q3’16, half of the bank’s external debt is maturing within a year which with Fed tightening likely and lira weakness probable the bank could have severe refinancing risks. This is not the only bank in this position. These banks’ problems could also be compounded if the rating agencies take a dim view on Turkey’s sovereign outlook as a downgrade of Turkey to junk will further pressure banking.

As we have seen before in Ireland and Spain to name a couple, bank problems do affect the government balance sheet during times of stress. Turkey has a NFA score of -71% and so is a two star country, and thus outside our mandate for investment. With little improvement expected over coming years in Turkey's financial condition we are not holders of and are not looking at adding any Turkish debt to our portfolios.

However, we are quite susceptible to a seasonal Turkey sandwich, with stuffing naturally.