Lack of commitment to reform could hurt Turkish state bonds
LONDON – Demand for Turkey’s dollar bonds has risen alongside its weighting in key indices but analysts say technical factors may not be enough to underpin prices if political commitment to economic reform wanes. Turkey’s segment of the industry benchmark, JP Morgan’s Emerging Market Bond Index Plus, is now the fourth largest, accounting for 4.5 percent of the index by value. Its greater share means investors who use the EMBI+ as a benchmark must increase their holdings of its debt, or risk being underweight the index. «The bigger a country’s market capitalization gets in the index, the wider the potential pool of investors,» said Peter West, senior economist at Poalim Asset Management in London. «Investors have to benchmark themselves off indices and… you can’t neglect something that is more than 4 percent.» Greater demand from international investors should help cut Turkey’s funding costs, by reducing its reliance on domestic borrowing, for which interest rates are sky high. The country’s 10-year dollar bond currently yields 11.38 percent, compared with a yield of 59.7 percent for its benchmark domestic bond, due March, 2004. But Turkey’s failure, under the leadership of the Justice and Development Party (AK), to meet economic targets set by the International Monetary Fund under a $16 billion aid program may limit demand for its debt. Analysts said Turkey risks losing much-needed foreign cash, which would undermine the country’s nervous recovery from 2001’s painful financial crisis. «It is not justifiable… Turkey trading at these levels with all the macroeconomic problems that it has,» said Henry Stipp, economist at Threadneedle Asset Management. He said investors were betting on Turkey becoming a beneficiary of additional aid in the event of war in Iraq. «(Turkey) is going to get money from the US if there is a war, they will get money from the IMF. This is why it is trading at these levels,» Stipp said. Turkey says the United States has pledged $30 billion in grants and loans in return for the right to use Turkish military bases and air space to open up a northern front against Iraq, Turkey’s neighbor to the south. A parliamentary motion to allow US troops into Turkey was narrowly rejected three weeks ago, but may be brought before Parliament again. But even if more money is forthcoming, it is likely to be linked to the targets set by the IMF and recently missed. «Turkey has already missed a couple of IMF targets, but at the time the market was not really worried, because they thought it was clear that Turkey would back the US troops,» said Amir Ben Gacem, emerging debt strategist at HSBC Markets in London. «Now, that has been put in question.» The IMF said this month it would insist on Turkey carrying out reforms promised by the previous government, but not yet implemented by the AK, before paying out $1.6 billion in April as scheduled. These include tax reform, civil service payroll cuts, and accelerated privatization. But Turkey’s 2003 budget may already break some of those conditions. The World Bank’s representative in Turkey said this week that its loans would be stopped unless the budget’s tax provisions were revised. The World Bank does not speak for its sister organization, the IMF, but the critique revived analysts’ doubts. «I don’t have much faith in this government. Whatever happens with the US aid… I think there is going to be a major test with the IMF later in the year,» said Tim Ash, emerging debt strategist at Bear Stearns in London.
