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Turkey almost completes 2014 foreign borrowing Strong investors demand for Eurobond

ISTANBUL, April 9, (RTRS): Turkey has almost completed its planned external borrowing for 2014 after selling a 1 billion euro ($1.38 bln) bond that was snapped up by foreign investors, the Treasury said on Wednesday. The issue will ease pressure on Turkey’s finances as it navigates a cycle of elections amid a damaging political corruption scandal and as the US Federal Reserve winds down the stimulus that has flooded emerging markets with cheap cash. Orders for the bond, which was launched on Tuesday and matures on April 11, 2023, were six times the issue size, the Treasury said, adding that Turkey has now met more than 90 percent of its foreign borrowing needs for this year. Turkey’s dependence on external funding to cover its large current account deficit is seen as the economy’s key weakness. “The demand for the Eurobond issue that came after the (local) elections has shown the confidence in Turkey and the Turkish economy,” Finance Minister Mehmet Simsek told Reuters.

Prime Minister Tayyip Erdogan’s government has been dogged since December by a corruption scandal he has cast as a plot orchestrated by his political enemies to undermine him, one of the biggest challenges of his 11-year rule. His AK Party nonetheless dominated local elections on March 30, prompting a mini rally in Turkish assets as markets took the results as a sign of political continuity. But the country still faces uncertainties, with a presidential election in August and parliamentary polls due next June.

Relief
Turkish equities and the lira hit their strongest levels of the year on Tuesday, outperforming a wider rebound in emerging markets on continued relief at the outcome of the municipal elections after a period of bitter campaigning. Both slipped in profit-taking on Wednesday, with the Istanbul stock exchange down 1.24 percent by 1107 GMT and the lira trading at 2.11 to the dollar from around 2.09 late on Tuesday. “The bond issuance seems to be coinciding with a pick-up in investor confidence towards Turkey,” said William Jackson, emerging markets economist at Capital Economics in London, although he said Turkey was vulnerable to a slowdown in inflows. “My concern is that the same external vulnerabilities that have afflicted the country over the past year — a large current account deficit, high levels of private sector short-term external debt, and low FX reserve coverage — are still with us.”

The Eurobond carried a coupon of 4.125 percent and was priced to give a yield of 4.2 percent. Turkey paid a sightly lower premium over benchmark swaps than when it last borrowed in euros in November.
Foreign investors accounted for 85 percent of demand for the issue, most of them in Germany. A Eurobond is sold to investors outside the country in whose currency it is denominated. “I think foreign investors have enduring faith in the AKP administration, and the technocratic strength of the Treasury,” said Timothy Ash, head of emerging markets research at Standard Bank in London, describing the transaction as a “blowout”. But not everyone agreed. Some analysts argued that gathering economic headwinds and an uncertain political outlook meant demand was driven by demand hunger for yield rather than an underlying confidence in Turkey.

“Turkey’s problem isn’t funding itself, which it has been doing with relative ease since the sell-off in emerging markets began last May, it’s its economy, which is slowing significantly,” said Nicholas Spiro, head of Spiro Sovereign Strategy in London. “The bond issue is not a vote of confidence in Turkey’s government. It’s a conspicuous example of the ‘reach for yield’ which still pervades financial markets. Recent improvement in sentiment towards Turkey has been entirely externally driven.” Erdogan has made little secret of his ambition to become president but his candidacy in the August election remains uncertain. His aides say his priority is to finish off a battle with US-based Turkish cleric Fethullah Gulen, a former ally whose followers within the police and judiciary he blames for contriving the corruption scandal against his government. Erdogan last week called for an emergency rate cut, saying his party’s victory in local elections had boosted markets and such a move would encourage investors. But the comment revived fears about political meddling in monetary policy. “For the time being, markets are shrugging off concerns about the escalating corruption probe and the politicization of Turkey’s economy,” Spiro said. “Indeed, investors are, to all intents and purposes, doing the bidding of Mr Erdogan.”

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