GeriGündem Gov't debt to retain its attraction, analysts say
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Gov't debt to retain its attraction, analysts say

ANKARA - Turkish government debt should retain its allure for both foreign and local investors despite yields having plunged to all time lows in the secondary debt market and lingering uncertainty over a new IMF loan accord, said analysts.

Banks, hit by a rise in non-performing loans, are reluctant to take up new risks by lending to firms or individuals at a time of a global slump and deep recession in Turkey, and state bonds still offer higher rates than other countries.

The yield on the benchmark Turkish bond Feb. 2, 2011 was 12.41 percent yesterday, offering a return of almost twice the rate of inflation - seen by the end of 2009 at 6.57 percent according to the Turkish Central Bank's survey.

"Policy rates still show Turkey returns positive yields in real terms when real interest rates are negative in many emerging markets," said Finans Invest economist Banu Kıvcı Tokalı.

Expectations of more central bank rate cuts this year and a deal with the International Monetary Fund, or IMF, also support Treasury borrowing despite a rising budget deficit and borrowing requirement, economists said.

"The Treasury could borrow 250 percent more than its Turkish Lira debt redemption in April. I do not think that the Treasury will have a problem finding buyers at home," said ING Bank economist Şengül Dağdeviren.

Debt repayments
The Treasury expects 2009 total debt repayments to amount to 153.9 billion liras ($93.61 billion), it said late last year. It sold 979.5 million liras of a main bond at auction earlier this month at an average yield of 13.35 percent. Markets performed relatively well in the last 5-6 weeks on the back of improved global risk appetite and as investors anticipated the securing of an IMF package, expected by some economists to be as high as $45 billion.

"The Treasury is relatively in a better condition for May despite hefty redemptions. It borrowed an extra 5 billion liras in April and it will also be comfortable because of corporate tax payments in May," HSBC strategist Fatih Keresteci said.

Turkish debt is ranked as BB-, a sub-investment grade, by both Fitch and Standard & Poor's ratings agencies. S&P revised its ratings outlook for Turkey to negative from stable in November. Traders cautioned that investors may lose appetite for Turkish debt if interest rates continue to fall and if the government does not sign a deal with the IMF to ease concerns over the Turkish economy. There is also a risk of currency weakness.

Rates have fallen by 700 basis points since last November in a series of cuts. "Clearly, 12.50-13.00 percent yield levels are still reasonable compared to the global rates. But if they retreat to 10-12 percent, then reluctance may emerge to buy Turkish bonds," said Demir Life Insurance portfolio manager Cengiz Kılıç.

Turkey's most closely watched Central Bank interest rate is 9.75 percent, versus a rate of 3.75 percent in Poland, and 6 percent in Mexico, a similar-sized emerging market.

"The IMF will to some extent tie the hands of the Turkish government, but the IMF has recently softened its stance towards their demands for tight fiscal discipline, and that could create currency weakness in the coming month," said Lars Rasmussen, senior analyst at Danske Bank.

Emerging market debt spreads were 573 basis points, or 5.73 percent, over U.S. Treasuries yesterday, while this was 441 for Turkey's sovereign debt.

A fast-rising budget deficit is a growing concern for foreign investors. The Turkish Lira lost 7 percent so far this year against the U.S. dollar and the government had to raise its budget deficit target for 2009 nearly fivefold.

"Investors are also aware of the rising public debt, as well as large foreign debt obligations of firms, which are to be rolled over in a large scale in the second half of 2009," Rasmussen said.
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