The Daily Update - Turkey - Keeping it in the Family

On Friday Fitch downgraded Turkey’s long-term credit rating by one notch, to BB, negative outlook; in-line with Moody's, and one notch above S&P’s BB- rating. We highlighted our concerns last month, ahead of the elections, as the economic fundamentals looked increasingly shaky and the lira collapsed; currently down 20.5% ytd. Also, inflation hit a 15-year high of 15.39% yoy in June off the back of the tumbling lira. In terms of other key economic points, Fitch stated that Turkey’s credit account deficit is expected to widen to 6.1% this year saying it “believes downside risks to macroeconomic stability have intensified owing to the widening in the current account deficit (CAD), more challenging global external financing environment, jump in inflation and the impact of the plunge in the exchange rate on the private sector, which has significant foreign currency-denominated debt.” Adding, “economic policy credibility has deteriorated in recent months and initial policy actions following elections in June have heightened uncertainty. This environment will make it challenging to engineer a soft landing for the economy.”

To add to the destabilisation, it is well known that recently sworn in President Erdogan is not a big fan of higher interest rates and just last week, Erdogan appointed his son-in-law Berat Albayrak as Turkey’s finance and treasury minister; a move that appeared to upset markets. Albayrak did try and calm markets by promising to do whatever it takes to contain market conditions; however, rating agency Moody’s highlighted its concerns about the country’s central bank’s independence. Adding that the appointment is credit negative “given the importance of that institution’s role in addressing the growing imbalances in Turkey’s economy and financial system.” Turkey will require further borrowing to finance its budget deficit, as such Fitch said: “Turkey’s large gross external financing requirement leaves it vulnerable to shocks”. The rating agency estimates external borrowing is close to USD300bn for this year; this debt could come under pressure as investors continue to dump bank stock, which could lead to debt defaults.

Turkey’s USD 30-year yield currently stands at ~7.5%, with a risk-adjusted expected return and yield of 21.25%, however, the bond offers less than 1.3 notches of credit notch protection, using the better BB rating. The nation’s 5-year CDS is trading at 325bps, only marginally tighter than that of Tunisia. Although these levels may look pleasing to some, we would not touch Turkey, no matter how “attractive” it might look, the nation is rejected from our investable universe purely from a 2 star NFA position. 7 star rated Abu Dhabi on the other hand looks far more compelling. Its benchmark USD 30-year yields 4.4% and offers an expected return and yield above 16%. Indeed this is not as attractive as Turkey’s, however, the bond is rated AA by S&P and Fitch and is 3.7 notches cheap and Abu Dhabi’s 5-year CDS is only 65bps; so a much “safer” option.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.