Turkish 3-year sukuk raises $2bn at 5.8% on soaring demand

Turkish 3-year sukuk raises $2bn at 5.8% on soaring demand
By Akin Nazli in Belgrade February 15, 2019

The Turkish Treasury on February 13 sold $2bn worth of 3-year lease certificates with a yield to the investor of 5.80%, it said on February 14 in a written statement.

The initial price guidance for the sukuk bonds (Islamic bonds) due February 2022 fell to 5.9% from 6.125% as demand soared to more than $3.5bn, Reuters reported on February 13, citing unnamed banking sources.

“The offering attracted an orderbook of approximately three times the actual issue size,” according to the statement from the Treasury.

The spread over market rates continued to decline sharply in the latest international sale. It fell to 318bp over the mid-swaps (MP), the lowest level since January 2018. Spreads on Turkey’s eurobond sales reached 497bp in the January 2019 auction (See table below).

Turkey has raised $5.4bn from the international capital markets in 2019 to date.

Turk Telekom eurobonds
Also on February 14, Turkey’s largest telco, Turk Telekom, said in a bourse filing that its high-level management would carry out investor meetings arranged by mandated lenders Bank of America Merrill Lynch, Citi, ING, MUFG and Societe Generale in London, Boston and New York, starting from February 15 to issue $500mn worth of eurobonds with maturities between 5 and 7 years.

Last week, the Capital Markets Board’s (SPK’s) regular weekly bulletin showed that Turk Telekom had been given the green light to issue up to $500mn worth of eurobonds abroad.

Also on February 14, Standard & Poor’s said in a written statement that it had affirmed Turk Telekom at BB-/Stable.

“We now expect a stronger Turkish lira against the U.S. dollar at 5.50 in 2019, compared with 6.90 in our previous base case,” the rating agency also said.

S&P is expected to release its sovereign rating review for Turkey on February 15 after the markets close.

Election economy? Nothing to see here
Even observers with only a modicum of cynicism should be on the lookout for fiscal and monetary moves that might give target voters a lift in advance of the March 31 local elections in Turkey. The polls are increasingly being seen as a referendum on the Erdogan administration given the country’s economic turmoil following the currency crisis that rocked Turks last summer.

To populist President Recep Tayyip Erdogan there is plenty of blame to spread around both at home and abroad for Turkey’s economic woes, though none of the blame givers should tangle with his economic stewardship or that of nearly all-powerful executive presidency. In the meantime, Turkish Finance Minister Berat Albayrak, who is Erdogan’s son-in-law, is busy yanking at what levers he can in the economic engine room.

February 15 also saw the central government budget data release for January. According to figures provided by the Ministry of Treasury and Finance, the central government’s budget surplus of TRY5.09bn was three times higher than the TRY1.67bn in January 2018.

“Every realization, every indicator reveals our firm stance in budget discipline,” Turkish Finance Minister Berat Albayrak said on Twitter, commenting on the January budget figures.

No information on spending
Albayrak praised the achieved budget and primary surpluses as well as the 67% annual increase in revenues to TRY97bn in January, but he did not disclose any information on spending.

The budget data showed that the government increased its spending by 62% y/y to TRY92bn in January from TRY56.5bn a year ago while its tax revenues rose by 7% y/y to TRY55.7bn from TRY52bn.

Albayrak said on January 9 that the government was previously expecting to receive TRY20bn from the central bank’s profits but would in fact obtain TRY37bn within the month. The general assembly of the Central Bank of the Republic of Turkey (CBRT) approved the early transfer of its 2018 profit to the government and other shareholders at an extraordinary meeting on January 18. The Central Bank normally transfers profit owed to the Treasury in April.

CBRT governor Murat Cetinkaya on February 14 voiced the possibility of easing liquidity.

Excluding the one-time revenues from the early transfer of the central bank profit, the central government budget posted a deficit of TRY30bn in January, Muammer Komurcuoglu of Is Yatirim told Reuters.

Is Yatirim expects a budget deficit of TRY100bn, or 2.3% of GDP in 2019, versus a government target of TRY81bn, or 1.8% of GDP.

“In addition to the slowdown in economic activity, tax revenues displayed a weak outlook due to incentives, while the rapid rise in non-interest expenditures stood out. On the other hand, the negative effect of the tax losses on budget performance was limited by transferring CBRT’s profit to the budget in advance. This transfer, which is one-off for each year, raises concerns about budget performance for the rest of 2019 and points to the need for a tightening of fiscal policies,” Isbank Research said in a note.

Also on February 15, the Ministry of Treasury and Finance said in a separate statement that a World Bank loan agreement worth €222mn for the Turkey Irrigation Modernisation Project has been signed.

Back on January 22, the World Bank said in a press release that its board of executive directors had approved a $252mn loan and a $2mn grant for the project.

“The agriculture sector employs about 21 percent of the population and accounts for 60 percent of the rural workforce in Turkey,” Mariam Sherman, World Bank acting country director for Turkey, said.

The project is being led by the Ministry of Treasury and Finance, with Turkey’s State Hydraulic Works (DSI) as the implementing agency for the project, according to the World Bank.

Neither the ministry nor the World Bank specified when the project would be concluded. However, the impact could be felt in the official figures for February inflation.

“Good tidings” from the state vegetable offensive
Headlining more “good tidings” for February inflation, pro-Erdogan media have also claimed that supermarket chains cut their vegetable prices countrywide after the government launched 50 mobile kiosks in Istanbul, home to more than 15mn people, and 30 more in Ankara, home to more than 5.5mn people, to sell veg at around half-price compared to the private sector.

Also on February 15, state statistical institute TUIK announced in a regular data release that the unemployment rate reached 12.3% in November. That’s the highest level registered since February 2017. Youth unemployment gained to 23.6%.

“Turkey—clear signs of fallout from crisis, with unemployment picking up to 12.3% in November. Seasonals see pick up this time of year (before local elections), but it’s higher 200bps which shows the cost of the crisis,” Tim Ash of Bluebay Asset Management said on Twitter.

However, as one response to Ash from a Turkish Twitter user inferred—“Please, for god's sake, take a look at how unemployment is calculated in Turkey, then make comments about it. If the data is bad, comments can't make sense, can they?”—there is a question as to whether analysts should actually take the Turkish unemployment data with a bucket of salt.

The TUIK calculates the workforce at around half of the adult population. According to its data, the number of people in the Turkish population of towards 82mn older than 15-years-old stood at 60.9mn as of November (60.8mn as of October) but TUIK calculates the labour force at 32.3mn (32.7mn as of October). Of those people, 28.3mn are employed (28.9mn in October), including 5.02mn people in agriculture (5.3mn in October).

Public sector employment grew by 21% y/y to 4.35mn people in Q4, according to data compiled by the Turkish presidency’s budget and planning department, Reuters reported.

“November also saw employment generation turn negative on an annual basis for the first time since mid-2009… On a sequential basis, job creation in November was at -228K, the worst reading since Jun-16, driven by all sectors, namely services (-87K), agriculture (-54K), construction (-47K) and industry (-40K). The data reveal that construction and agriculture, which employ a large share of low-skilled workers, recorded -363K and -250K year-to-date declines in employment, respectively, showing that they have been impacted the most from last year’s financial volatility…,” Muhammet Mercan of ING Bank said in a research note.

“Employment growth in services and industry compensated for the losses in construction employment until recently but the recent data shows signs of job generation weakening in these sectors, too,” he added.

“The deterioration in activity first had a negative impact on construction sector employment since the unregistered employment is high in this sector. The share in unregistered employment in the services sector is also high which implies that the decelerating economic activity would continue weigh on the services sector. However, the strong performance of the tourism sector as well as the help of the government incentives might play a constructive role in this sector. The share of unregistered employment in the industrial sector is rather limited, rendering layoffs rather costly. As per the leading factors, the expectations for the number of unemployed in 12-month forward looking as well as the course of the Capacity Utilization Rate underline the negative outlook,” Ozlem Bayraktar Goksen of Tacirler Invest said in a research note.

Retail sales suffer record contraction
Also on February 15, the TUIK said in a separate press release that Turkey's calendar-adjusted retail sales volume index declined by 9.2% y/y in December, the biggest annual contraction since the data set was first compiled in 2010. The December data extended the longest annual contraction period on record to four months.

The initial data set for Q4’s GDP growth is now completed. The Q4 growth data will be announced on March 11.

Worse-than-expected Q4 growth might help the central bank justify liquidity easing as Turkey pursues an economic recovery.


Turkish Treasury's Eurobond Issues in 2019
Issue Date Currency Size Maturity CouponRate (%) Price
Yield to Investor
Yield to Investor (Spread) Euro Cost (%)
21.02.2019 USD 2 billion 21.02.2022 5.8 100 5.80 MS + 318 bps  
31.01.2019 EUR 1.25bn 31.03.2025 4.625 99.36 4.75 MS + 446 bps  
16.01.2019 USD 2bn 26.04.2029 7.625 99.555 7.68 UST + 497bp 4.965
Turkish Treasury's Eurobond Issues in 2018
17.01.2018 USD 2bn 17.02.2028 5.125 99.411 5.20 UST + 266.7 bp  
24.04.2018 USD 2bn 24.10.2028 6.125 99.427 6.20 UST + 336.8 bp  
23.10.2018 USD 2bn 23.12.2023 7.25 98.917 7.50 UST + 447.5 bp  
14.11.2018 EUR 1.5bn 16.02.2026 5.2 99.73 5.25 MS + 456.4 bp  
Turkish Treasury's Eurobond Issues in 2017
23.01.2017 USD 2bn 25.03.2027 6 99 6.15 UST + 375.7 bp  
23.02.2017 USD 1.25bn 25.03.2027 6 103 5.65 UST + 320.5 bp  
11.05.2017 USD 1.75bn 11.05.2047 5.75 98 5.875 UST + 286.7 bp  
14.06.2017 EUR 1bn 14.06.2025 3.25 99 3.377 MS + 285 bp  
13.09.2017 USD 1.75bn 11.05.2047 5.75 101 5.70 UST + 300.5 bp  
Turkish Treasury's Lease Certificate Issues in International Markets in 2017
06.04.2017 USD 1.25bn 06.04.2023 5 100 5 MS + 285 bp  
source: treasury