Turkey: New steps forward

Having issued two highly anticipated Islamic bonds (sukuk) recently and boasting continuing expansion in the conventional banking segment, Turkey looks set to maintain its current growth trend in financial services. However, there is still some cause for concern, with one sukuk not performing as well as expected and the economy likely to miss its target of 4% growth for 2012.

On September 18, Turkey issued its first sovereign sukuk, a five-year, US dollar-denominated paper that raised $1.5bn. The sukuk was oversubscribed by five times and priced at a profit rate of 2.803%. However, the sukuk’s performance in the secondary market has been rather disappointing so far, with the bond dropping to $0.98 on the dollar soon after its issue and staying below par since then.

It is possible, as international media have suggested, that some buyers glossed over the sukuk’s risks, such as last-minute upsizing of the issue – which was expanded to $1.5bn only in the final hours – and a large allocation to the Middle East, due to it being Turkey’s first sovereign sukuk.

Nonetheless, that issue was followed two weeks later by Turkey’s first lira-denominated sukuk on October 3. The two-year, TL1.62bn ($904m) sukuk also attracted strong initial demand, with total bids for the certificate reaching TL3.28bn ($1.8bn).

Part of the first, US dollar-denominated sukuk’s success likely came from the support it received from a number of ratings agencies. Standard & Poor’s ranked the issue a “BB”, while Moody’s gave the paper a “Ba1”.

“The government’s financial strength has been improving steadily over the past decade,” Moody’s noted in a statement explaining the ranking. “This improvement can be seen across a wide range of financial metrics, such as debt/revenue and debt affordability. In its rating methodology, Moody’s now assesses the government’s financial strength as ‘high’.”

Perhaps most importantly, both issuances are expected to facilitate further issuances in the private sector, thereby creating new channels of liquidity in the economy. “Examples from around the world show that the Islamic banking and financial sector needs government support in order to realise its potential.” Ayhan Keser, the executive vice-president of Al Baraka Turk, told OBG. “This is why Turkey’s recent sovereign sukuk, which will create a benchmark for private sukuk issuers, was so important.”

Meanwhile, the banking sector as a whole continues to post impressive results. According to Mukim Öztekin, the president of Turkey’s Banking Regulation and Supervision Agency, profits in the conventional banking system are expected to reach as high as TL23bn ($12.79bn) this year.

“The Turkish banking industry has registered a net growth of 10.5% in the past 10 years, and it is highly likely the industry will maintain this upward trend in the next 10 years,” Öztekin told the Anatolia News Agency in July.

However, those predictions may be optimistic. The Central Bank of the Republic of Turkey (CBRT) is taking steps to help ensure a “soft landing”. It cut the overnight lending rate from 11.5% to 10% on September 18, a sign that the bank is becoming concerned about growth. The rate cut followed comments from Zafer Çağlayan, the minister of the economy, who said that it was “becoming difficult” for the country to reach a government goal of 4% economic growth by the end of 2012.

This has caused the CBRT to take steps to ensure that any economic slowdown will not hinder longer-term growth prospects. The CBRT cut the upper boundary of its interest rate corridor by 150 basis points to 10%. However, central bank officials have said they are confident that economic growth, which slowed largely due to weakening domestic demand, will pick up again in 2013.

Still, the CBRT has a difficult balance to strike indeed. Ahmet Yildirim, the CEO of Yapi Kredi Yatirim, told OBG, “The Central Bank can use monetary policy to promote growth; however, it needs to be careful about introducing currency risks into the economy,” he said. “Decreases in the rate corridor, for example, can create excess liquidity in the market and lead to further depreciation of the lira.”

While the short term may be tinged with some doubt, the country’s long-term prospects are bright. The sukuks are likely to spur new investment from the private sector, as it continues to see new ways to invest in Turkey’s banking potential.

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