Turkey CDS Update by jbchevrel, May 30, 2023
Last May 10/11, Turkey credit spreads collapsed with 5-year CDS moving from 555 to 480bp at some point. In a reversal to what happened in early March, the market expected that an opposition *united* against Erdogan could win. The move was accompanied with a decent steepening of the curve. Market participants had been reported to take off hedges ahead of the election, on Thursday. Then, on Friday, fast-money accounts were reported to reset hedges on Turkey CDS, benefitting the move tighter. Sunday May 14, it became clear that not only the opposition candidate wouldn’t win in the first round, but also that Erdogan was almost sure to win in the second round, given that the 5% of votes to nationalist candidate Ogan would mostly go to Erdogan. Which he did, eventually. Those who bet on the end of Erdogan’s unorthodox economic and monetary policies got burnt, and Turkey 5-year CDS widened +136bp to 631bp on the following Monday, May 15. As markets saw another Erdogan mandate as ineluctable, more of the same [ultra-loose monetary/fiscal policies, inflation 40-50%, current-account deficit/gdp 5%+, falling currency and pent-up FX demand] was expected. Support from other countries could take Turkey CDS tighter, in punctual episodes similar to March 7, when Turkey 5-year tightened as Saudi made a $5B deposit at CBT. Today saw a relief rally in Turkey CDS after Erdogan’s [expected] victory over the weekend, and rumours of a fresh economic team possibly including former finance minister Mehmet Şimşek, potentially heralding a shift to orthodoxy, which would contrast with the policy of the past five years. Short covering from both buy-side and dealers pushed 5-year CDS -50bp tighter [compared to Friday’s close] and the curve displayed a steepening bias [1s5s up +30bp, 2s5s up +20bp]. Turkey 5-year CDS remains in the middle of the range of the past year [500-900 in close-to-close], arguing for no obvious barrier for further tightening. In Q3 last year, Turkey 5y CDS saw wide levels up to 900bp along with the broader credit synthetic market, as market participants grappled with higher rates from DM central banks. Turkey under performance was amplified by an arguably too dovish central bank [CBT]. On Sep 22, the CBT reduced its policy rate by -100bp from 13% to 12% [consensus was no change] citing loss of momentum in economic activity due to the decreasing foreign demand in Q3. A new consensus built around another -100bp cut in October, where the CBT cut by -150bp, from 12% to 10.5% with guidance signaling one more similar step ending the easing cycle. A new consensus built around another -150bp cut to 9% which did happen. Last autumn, Erdogan said reserves would rise to $130B [2022 peak $117.5B] and on Nov 22, it was reported that Saudis were to deposit $5B at CBT.
www.hurriyetdailynews.com
