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.

MS: Turkey Economics: A Lower CAD, Thanks to Oil

At US$2.2 billion, corresponding to a 9%Y decline, the current account deficit (CAD) for January was lower than our and consensus expectations, at US$2.7 and US$2.4 billion, respectively. The annual CAD declined by US$0.2 billion to US$31.9 billion, representing 4.4% of GDP. 

The contribution from the energy part was quite strong in January; we expect a similar trend in the energy part of the CAD to continue in the remainder of the year with the assumption that oil price remains at US$37 on average.  

On the financing side, portfolio inflows and FDI as well as unexplained inflows were quite weak, while banks and corporate borrowings were strong, as also confirmed from the high debt rollover ratios for LT loans.   

However, looking only at the long-term rollover rates can be misleading. When we combine short-term and long-term borrowings, banks are still borrowing more than what they repaid; however, the net amount they borrowed is trending down sharply. 

Further contribution from lower energy prices in the remainder of year is likely to be offset by lower tourism revenues and an increase in non-energy goods deficit. 

The effect from the tourism sector is likely to be more visible after June, as almost two-thirds of revenues are recorded in the June-October period. The risks are to the upside if we see bigger declines in tourism revenues than what we pencilled in and/or oil price continues its upward trend.