Will appetite for Turkish risk cool significantly as global liquidity contracts?

  • The jury is still out, but trade financiers retain a positive outlook, writes Kevin Godier.The second half of 2007 threw up some of the greatest credit market turmoil witnessed in the last decade. Yet as the year end neared into view, GTR found few signs of the trade finance community losing its appetite for the flow of Turkish risk that has provided its practitioners with good business through all credit climates. 

    Although banks have pushed for slightly higher pricing on Turkish debt paper in recent months, bona fide trade deals have come through relatively unscathed, financiers report.

    “In the secondary market, some investors are pushing for an extra five basis points, but the lower tier Turkish bank risks can still be traded,” was the view of one forfaiter.

    “We have seen a small increase in risk pricing for all Turkish transactions. This small movement reflects the confidence banks and investors have in Turkey despite recent challenges,” observes Jeremy Shaw, head of global trade services for JPMorgan Treasury Services in the EMEA region.

    Yet the confidence that Shaw cites is in many ways divorced from economic fundamentals, most notably the effect of commodity prices on the massive current account deficit carried for so long by Turkey.

    Having hit US$20bn in the first half of 2007, equivalent to 6% of GDP, the deficit has the potential to trigger the type of currency devaluations – and consequent capital flight – that left Southeast Asian markets in tatters a decade ago.

    The threat was shown clearly in 2001, when currency devaluations cost Turkey the loss of some 10% of its economic value. Obviating a repeat necessitates a constant inflow of investment and financing to plug the deficit and prop up the Turkish lira.

    Foreign direct investment worth US$22bn did the trick in 2006, and the government’s privatisation programme “should fill the gap this year and next”, says James Pumphrey, director of structured trade and export finance at Deutsche Bank.

    As GTR went to press, the lira had been appreciating throughout 2007, buoyed by tighter fiscal policies and ongoing consolidations in the banking sector. Illustrating the lira’s current robust health, Export Development Canada (EDC) is willing to transact local currency deals in Turkey as part of a push to increase Canadian exports. “We are happy with Turkish lira risk,” says Burak Aktas, regional manager for Southeast Europe and Eastern Mediterranean.

    Even Turkey’s range of political uncertainties – not least its steady shift from a secular state to a more fundamentalist environment, and the recent growth of tensions with Kurdish separatists based in northern Iraq – are unable to ruffle the calm view in the markets.

    Positives here, say analysts, are the eventual prospect of accession to the European Union, with whom Turkey began membership talks in late 2005, and the resounding election win in July of the ruling AKP Party, bringing to the presidency the former foreign minister Abdullah Gul.

    Indeed, the confidence in Turkey is such that markets seem to have disassembled any linkage between the economy’s underlying fragility and its political risks, according to Steve Capon, head of country and credit risk management, Ace Global Markets. “In the short term, at least, we expect markets to continue to support the deficit,” he predicts.

    This pot pourri of differing pressures and vectors has kept trade financiers and insurers busy in Turkey for decades. “Turkey is the dream market for this industry, because it contains such a fascinating mix of good news and bad news,” says Bob Svensk, who heads US-based Svensk & Company consultancy.

    “The good news is that it is a rapidly growing country, where capital goods are needed to build industries, and the economy is very open to foreign investment and trade. The bad news is the country’s perpetually large current account deficit, which gives rise to perceptions of uncertainty that won’t go away,” he underlines.

    Another view to have emerged in recent months is that Turkey and other large emerging markets have – for the time being at least – buried the perception that they become the most vulnerable to crises when risk aversion spreads through financial markets. “A Turkish bank told us recently that the real crisis is the one emanating from the US, and was quite adamant that Turkey is a relatively safe haven,” says the forfaiter.

    Busy busy

    As analysts keep a weather eye on these trends, GDP growth hovering near 5% in 2007 has maintained Turkey’s traditional role as one of the world’s most active and competitive trade finance markets. “Our activity in Turkey remains buoyant with a consistent level of transactions and trade flow,” says Shaw.

    “Turkish risk is very well received, so the country is still a very popular place to be. But there is lots of foreign capital in the banking system, with banks like Dexia, ING, Unicredito and BNPP all trying to get as much as they can locally,” adds Helena Dziewaltowska, regional manager, trade finance, Europe & Americas, Fortis Merchant Banking.

    She comments: “It is very hard to win business right now, because local banks have lots of correspondents, and lots of lines, and put us in competition with the other banks.”

    Among the regularly purchased imports paid for via letters of credit (LCs), she notes, are steel consignments from Switzerland and the UK, oil from the Gulf region, and various commodities from the CIS, as well as different construction projects.

    “At present we see a large amount of interest amongst the international banks for Turkish assets,” agrees James Cunningham, head of Marsh’s political risk team in London. “Turkey is a very active marketplace, where operations range from a large volume of short-term trade finance and syndicated loans, through to export finance type buyer credits, and project and infrastructure finance.”

    At AIG’s trade credits division in London, head Neil Ross affirms that “we still see a steady stream of enquiries for Turkey”.

    As has often been the case with Turkey, capacity issues exist in the private insurance market, due to the sheer volume of exposure on these types of credits. “The private market constraints could increase the premium rates,” suggests Cunningham, who also offers an alternative scenario, where, as reinsurance treaties are negotiated for 2008, supply constraints could be obviated.

    Rates lift

    Pricing on Turkish trade and political risk has been watched hawkishly since the global liquidity crisis kicked off in the US mortgage market in mid 2007, stresses Capon. Yet, “despite the relative capacity issue and the sub-prime developments there has been next to no impact on Turkish pricing to date”, he observes.

    “We would hope this would change,” he comments, arguing that “pricing has become unsustainably low given the risk profile, especially in terms of corporates and then second and third tier banks.”

    Within the Turkish trade finance market, “some of the pricing has changed following the liquidity crisis, but the impact, for the time being, is not too significant,” says Yapi Kredi’s head of trade finance, Eylem Ekmekíi.

    The changes are not linked to local credit risk, argues Yonca Sarp, who runs the London Forfaiting Company’s representative office in Istanbul.

    “The funding costs of foreign banks have increased so they have to reflect this in the assets they book. Banks abroad also wish to sit on their liquidity more, so there is relatively less demand on any secondary paper,” she adds.

    “Pricing has dropped dramatically over the last two years,” emphasises Dziewaltowska. “It has increased a little recently, notably for funded deals, but not by much. Confirming an LC from the top Turkish banks costs about 40bp per annum, for regular deals,” she says.

    One traditional way to generate higher fees has been to work with middle and lower tier Turkish banks. “We find some of the participation (Islamic) banks very interesting, although we are unlikely to go lower than the second tier, as we are looking for a certain minimum level of capitalisation,” says David Lilley, head of forfaiting at SMBC Europe. Fortis Bank also looks at several smaller Turkish banks, adds Dziewaltowska, noting that “Bank Asya is developing very well”.

    In Turkey’s syndicated loan market, pricing for the top-tier financial institutions (FIs) “has increased slightly”, adds Pumphrey. He highlights that in August 2007, Yapi Credit and Akbank tapped one-year trade finance loans “at 47.5bp over Libor, all-in”, but adds that the terms of these deals “were agreed before the crisis began, and were heavily relationship-driven”.

    Finansbank, Turkiye Ekonomi Bankasi (TEB) and Vakifbank have all subsequently paid “slightly more” for one-year deals, says Pumphrey.

    According to Lilley, the introduction of Basel II is another factor that has made participation in the syndicated loan market more difficult. “We now have internal measurements that can rule out deals that are too finely-priced, and we are not the only ones – a fact that has forced Turkish banks to look more carefully when asking for pricing in the 40-45bp bracket,” he says.

    The heaviest impact of all, by consensus, has been in the secondary market for Turkish bank loans. “The secondary loan market has been knocked for six – pricing has been pushed out by 20-40bp,” comments a financier in the London market.

    “Buyer appetite is still there, but people are not looking to go out to medium-term tenors anymore. Nobody wants term deals in a credit crunch – and one result is that people are stuck with their longer-term Turkish assets this year-end,” he says.