Advanced Theory & Practice of Bonds

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1-2 December 2021

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Fitch revised Turkey’s outlook to Stable from Negative while affirming the rating at BB-. Near-term external financing risks derived from last year’s falling international reserves, a high current account deficit and deteriorating investor confidence have eased with Turkey’s ‘consistent and orthodox policy mix’ under a new economic team, Fitch stated. The central bank has adopted a simplified monetary policy with clear communication aimed at achieving sustained disinflation with a 5% target in 2023 besides building up FX reserves and reducing dollarization. Other positives include better public finances, moderate government and household debt levels and lowering of the finance ministry’s budget target for 2021 to 3.5% of GDP from the earlier 4.3% to support the disinflation measures. Fitch expects the disinflationary process to be gradual and decline though it would remain higher at 11% and 9.2% at end-2021 and 2022 than the central bank’s forecasts of 9.4% and 7%. Fitch also forecasts the current account deficit (CAD) to narrow to 2.9% an 2.1% in 2021 and 2022, from a high of 5.3% of GDP in 2020 due to slower domestic demand and reduced gold imports, alongside tight monetary policy expectations and improved confidence.

Fitch notes that international reserves have stabilized and slightly recovered – Gross FX reserves are at $95.6bn in February up 10% from its November low and net reserves were at $15bn though both remain weak overall. Turkey’s reserve buffers are at only 4.5 months of current external payments (CXP) versus 5.3 months for the median BB-rated sovereigns. Negatives include weak credit growth, down 18% YoY, sanctions and geopolitical risks and currency risks. Turkey’s dollar bonds were trading stable – their 5.95% 2031s were at 103.35, yielding 5.5% and their 4.875% 2026s were at 102.2, yielding 4.43%.

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