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Turkey raised $2.5 billion in dollar bond markets for the first time since April as the country’s broader economic policy shift lures back investors who had pulled out of Turkish assets in recent years.
The country received bids for more than $7 billion on Tuesday for a new issue of five-year dollar-denominated bonds, a type of Shariah-compliant debt instrument, according to a term sheet seen by the Financial Times.
Strong demand for the deal is the latest sign that investor sentiment is gradually improving since President Recep Tayyip Erdogan revamped his economic team after his re-election in May and set a course to end years of unconventional economic policies.
“The government has fought back…”[investors’]”Trust the story,” said Stephen Weiler, head of debt capital markets for central Europe, the Middle East and Africa at JPMorgan, who worked on the deal.
He added that Turkey was able to conclude better terms than a few months ago because some fears about Turkey’s economic trajectory had eased after the election.
Weiler said Turkey was also taking advantage of the recent decline in U.S. Treasury yields due to concerns about the state of the U.S. economy, securing lower borrowing costs than a few weeks ago.
The five-year sukuk was issued with a yield of 8.5 percent, according to the term sheet. Turkey’s Finance Ministry declined to comment on the bond issuance.
The $2.5 billion sukuk issuance means Turkey has achieved its goal of raising $10 billion in international capital markets this year. $7.5 billion so far has been raised through conventional and green dollar bonds, but a person familiar with the deal said the sukuk helped attract both Western and Gulf investors attracted to Islamic finance. Turkey plans to raise another $10 billion in international bond markets next year.
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The deal comes at a time when prices of Turkish assets are rising on financial markets. Traditional dollar-denominated bonds maturing in October 2028 were trading at a yield of 8.1% on Tuesday, up from a peak of more than 10% in May.
Investors are also seeking a sharp reduction in the premium they are asking for to hold Turkish government bonds. The yield spread between Turkey’s five-year dollar bond and U.S. Treasuries has narrowed to 3.6 percentage points from a high of about 7 percentage points in May, according to LSEG data.
Turkey’s new economic management team, led by Finance Minister Mehmet Symşek and Central Bank Governor Hafize Gaye Ercan, has begun to undo many of the unorthodox economic policies pursued by President Erdogan before the election.
For example, the central bank abandoned a long-standing policy of keeping borrowing costs low despite extreme inflation and raised interest rates from 8.5% to 35%. The government also sharply raised taxes to cool the robust consumer demand that was fuelling a surge in imports.
Both S&P Global Ratings and Fitch Ratings raised their outlook on Turkey’s credit rating to “stable” in September as a result of new economic policies, but it remains well within junk-bond territory.
Many investors also have deep concerns about how long Turkey will stick with its new economic policies.
“Turkey is about trade, not investment,” said Charlie Robertson, chief macro strategist at emerging-market-focused fund manager FIM Partners. “The market likes Simsek, but doesn’t trust Erdogan. For now, the former is outweighing the latter.”
A person familiar with the deal, who spoke on condition of anonymity, said investors remain concerned about “geopolitical risks,” especially after Erdogan has sharply criticized Israel and its allies in recent weeks.
According to the term sheet, Emirates NBD, HSBC, JP Morgan, KFH Capital and QNB Capital are acting as joint book-running managers for the sukuk transaction.
