The Daily Update - Turkey Junk

The Turkish lira remains under pressure, having lost over 20% against the dollar year-to-date, in fact, the lira is the worst performing currency so far this year according to Bloomberg’s “World Basket”. The weak lira is playing havoc with local businesses, which have started voicing their concerns over the inability to run day-to-day operations due to the currency’s volatility, and there are mounting fears of a debt crisis.

Rating agencies have also turned more pessimistic on Turkey’s future, with the likes of Fitch slicing its forecast growth rate for 2018 to 3.6%, from 4.7% yesterday; this follows Fitch’s one notch downgrade to Turkey’s long-term rating, to junk BB+, in January. S&P rates the country BB-, while Moody’s one notch downgrade to Ba2 in March was recently followed up by a negative watch signal, placed at the beginning of June.

Ahead of the upcoming elections this weekend, (which many suspect were brought forward, from Nov 2019, as a result of a weaker currency and strained economy), we may see the lira come under further pressure. Equally as worrying, however, is the potential further sell-off in the nation’s bonds. If we take the USD 15-year benchmark as an example, the bond was trading at a yield of 5.72% at the end of 2017, since then it has widened 225bps to 7.9%. If we look at the local debt market, just yesterday, Turkey issued a TRY 5-year fixed bond at 17.24%, that is ~525bps wider than where the benchmark 5-year was trading at the beginning of this year; investors would not want to have been long of Turkey this year.

Also, Turkey’s 5-year CDS is trading at 330bps, more than double that of Russia, which is currently priced at 158bps. Despite the high yields on offer, we have long identified Turkey as a nation within which we would not invest, mostly due to its low 2 star Net Foreign Asset ranking, lack of relative risk-adjusted value and shaky economic fundamentals, and more recently its junk rating.

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