With unemployment at 11.5% and industrial production up just 1% year-on-year, Turkey’s economy is dead in the water. The overall emerging market index (as gauged by the ETF EEM) is up 14% year to date, while the Turkish ETF is down 13% YTD. Doesn’t look like it’s time to catch the falling scimitar.
Asia Unhedged wondered how safe Turkey’s banks were in an April 7 analysis. Since then the sovereign itself has taken a beating, with government bond yields, the Turkish lira exchange rate with the dollar, and the national credit default swap spread all rising sharply.
Government bond yields spiked this month as the Turkish lira weakened past the 2.7 mark to the U.S. dollar. With $300 billion in foreign debt, Turkish nonfinancial corporations get hammered when their interest costs rise.
This is starting to impact Turkey’s credit, as measured by the spread to LIBOR of the country’s credit default swaps.
As recently as March, the overall emerging market index cost about 425 basis points over LIBOR for five-year credit protection, while Turkey coasted comfortably around the LIBOR +200 bps level–up from LIBOR +150 basis points at the end of 2014, but still relatively benign. Overall EM spreads have come in sharply, though, while Turkey continues to widen.
Categories: Asia Unhedged