International investors could soon get access to Turkey’s debt market after a deal between Brussel’s based Euroclear Bank and the Finance Ministry. It’s an important move after years of concern that Turkey was moving away from international markets.
It’s taken 8 years to get here
After eight years of talks, Euroclear Bank, an International Central Securities Depository (ICSD) and the Ministry of Treasury and Finance have reached a deal, with the imminent launch of a Euroclearable link to enable international investors to access to the domestic debt market. The deal should provide foreign investors full access to the local market in a more secure and standardised way. The Treasury will have enhanced access to wider liquidity pools. There’s also the potential for a reduction in the overall volatility of borrowing costs, as we’ve seen in other cases. Most importantly, after years of concerns that Turkey might disengage from international markets, this deal could mark a turning point and prove to be quite the opposite.
Turkey can potentially benefit in a number of ways
It can attract more foreign investors to invest in domestic markets. Turkey has been under pressure with greater volatility in core economic measures (i.e. inflation, interest rates etc.), while downgrades by rating agencies in the last few years have contributed to those stability concerns. Accordingly, we have seen a significant decline in foreigners’ market share in domestic bonds from almost more than one-fourth of the stock in early 2013 to slightly above 5%, the lowest of the current series which began in 2005.
Early experience from other countries shows that Euroclearability can be a booster to foreign portfolio flows. As an example, Russia signed an agreement on October 2012, and OFZ became fully Euroclearable in February 2013. Since late 2012, the share of non-resident investors has more than doubled with strong flows. This is also the case for other countries including Chile, Poland and so on.
It should be noted that the deal is unlikely to create a direct imminent impact given risk anticipation from high external financing requirements compared with other EM peers, a recent decline in reserves and continuing geopolitical fragilities. This has already been reflected on overall capital flows to Turkey, barely positive on a 12M rolling basis in recent months.
Any support from the deal to portfolio flows would be a plus for Turkey. However, for the benefits to materialise, foreign investors will also be looking for signs of stabilisation in the external financing (e.g. successful rollovers of syndicated loans, FX reserves), funding market and the TRY as Euroclearability by itself can be considered as a necessary but not sufficient step to broaden the investor base or to see a reversal in the decrease in foreign investor involvement.
Supportive impact on borrowing costs
Additionally, Turkey can benefit from the supportive impact on borrowing costs: Assuming a more diverse and stable foreign investor base following the Euroclearability that also allows local issuers to deal with a wide range of international investors, borrowing costs’ volatility should come down and reduce vulnerability to fluctuations in capital flows.
Turkey still enjoys a low public debt-to-GDP ratio relative to its peers, providing room to resort to more fiscal stimulus in times of strains, just look at the currency shock on 18 August and, of course, the Covid-19 pandemic. However, in the short-term, liquidity could be an issue due to increasing fiscal funding needs. The deficit is expected to exceed 5% of GDP in 2020 and public debt-to GDP is around 35% as of April 2020.
Given this backdrop, any support from the deal for more flexible and effective debt and fiscal management should be a plus for policymakers. In this regard, the Treasury can also have the flexibility to reduce reliance on foreign debt capital markets (USD/EUR external issuances) on the back of a broader investor base in local currency credit. Moreover, this could also help extend the maturity profile of the TURKGB curve. All of this would ease financing pressure and, over time, reduce concerns on FX external debt.
Excerpt from ING Research Report
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