Morning Meeting Notes Turkey - 15 November 2016

Weak demand to Treasury auctions

The Turkish Treasury issued TRY 1.3bn and TRY 2.0bn of 2y and 10y fixed coupon bonds yesterday. Demand in auctions was weak, with bid-cover ratio in 2y and 10y auctions at around 1.5, lowest since May. As a result, average yield in these auctions was at 10.13% and 11.08% respectively, about 5bp above market consensus. After the auction, yields eased marginally to 10.09% and 11.04%, but these are still 20bp above Friday close.

The Treasury targets to issue TRY 8.7bn of bonds this month, including TRY 1bn of rent certificates next week. Other auctions are TRY 5y fixed coupon bond and 5y FRN auctions today and 12m bill next week. Treasury will again target TRY 3-3.5bn in auctions today.

While this is close to its recent peak at 11.3% attained in January this year, average EM local bond yield reversed only one-third of the decline in average yield, as seen in Chart 2. So Turkey bonds are continuing to underperform amidst the global sell-off. Some recovery in line with easing US yields looks likely today but it’s too early to call for a trend reversal. At home, we think the short-end will be anchored by CBRT’s funding rates. Also, weak labour market data and deterioration in budget deficit today will likely put further steepening pressure on the curve.

Labour market and budget data today

August labour market data will likely show ongoing weakness in employment dynamics today. Seasonally adjusted unemployment rate rose by 1.3pp to 11.2% in the last three months, while   non-farm employment fell by a cumulative 188K in the last two months.

October central government budget will also be announced today. Budget deficit is to deteriorate significantly from last year, but this is more related to lack of privatization revenues this year against TRY 4.6bn received from 4.5G GSM licence sale last October. 

Further support to loan growth

According to newswires, economy management is planning to cut the banking and insurance tax to give further support to economic growth. If they lift this tax, it can lead to 75bp decline in interest rate on loans but would cost TRY 9-10bn (0.4% of GDP) for next year budget.

Also, the interest rate on the deposits of public sector institutions in public banks would be limited by the ON lending rate of CBRT, currently at 8.25%. This would lower the funding cost of public banks, in expense of public institutions, and enable public banks to extend credit at lower interest rates.  

teb