May 22 2018

Storm in Turkey’s economy as bonds trade below Senegal’s

Turkey has become the centre of a storm after President Recep Tayyip Erdoğan said he opposed higher interest rates and would take more control of monetary policy, Bloomberg reported citing observers including Tatha Ghose, an economist at Commerzbank AG in London.

As a result, the country’s dollar bonds are now cheaper than Senegal’s, trading at the equivalent of a single ‘B’ rating, two notches below their current level, Bloomberg’s Selçuk Gokoluk said.

Erdoğan’s remarks on interest rates and monetary policy last week “were the final nail in the coffin” and the country’s assets have now negatively decoupled from other emerging markets, said Okan Akin, a credit analyst at AllianceBernstein in London.

Turkey’s lira has sank to successive lows against the dollar in recent weeks and bond yields surged as Erdoğan espoused policies on interest rates and inflation that contradict conventional economic theory and set about extending measures to stimulate economic growth ahead of snap presidential and parliamentary elections on June 24.

Yields on February 2034 Turkish dollar bonds rose to 52 basis points above Senegal’s dollar bonds with similar maturity on Monday, signaling that investors expect a ratings downgrade, Gokoluk said.

Turkish debt is rated BB+, the highest non-investment grade at Fitch. Standard & Poor’s and Moody’s rank the country one step lower and one level above Senegal.