Turkiye’s risk premium continues to decline: 5-year credit risk premium fell to the lowest level

Turkiye’s 5-year credit risk premium fell to the lowest level in 9 weeks.

Turkiye’s 5-year CDS value, which went up to 898.33 basis points on 14 July, declined to 832.7 basis points on 20 July, then started to rise again, after reaching 886.53 basis points on 27 July.

While Turkiye’s 5-year CDS value fell below 800 basis points as of August 1, it fell to 732.78 basis points at the end of last week.

The CDS value has dropped 165.5 basis points since its peak on July 14, and fell to a 9-week low. Turkiye’s 5-year CDS value was realized at the level of 721.35 basis points on June 6th.

Analysts stated that CDSs of other developing countries also decreased and noted that the recession concerns and expectations that major central banks might limit interest rate hikes and the decline in commodity prices were effective in the decrease in CDSs. 

Analysts pointed out that the opening of the grain corridor and the developments in trade relations between Russia and Turkiye are among the factors that reduce the risk premium in Turkiye. They stated that the news that the Russian State Atomic Energy Agency (ROSATOM) has started to transfer $15 billion of its expenditures for the completion of the Akkuyu Nuclear Power Plant (NGS) to Turkiye may have had a positive impact on the country’s CDS.

“The possibility of decreasing the credit and interest risk increased the risk appetite in the markets”

Piri Reis University Vice-Chancellor Prof. Dr. Erhan Aslanoglu said that the scenario that global financial markets fear the most is worsening growth and increasing inflation.

Pointing out that the risk appetite decreased in stagflation scenarios, Aslanoglu said that all risk indicators were adversely affected, and CDSs were one of them.

Stating that a more moderate recession expectation has emerged after the latest data, Aslanoglu said, “There is a huge debt in the world, so the problem of paying this debt will increase if the growth problem increases. Therefore, global markets respond positively to a mild recession.”

Noting that the statements from the central banks also support this, Aslanoglu said that the risk appetite has increased a little because of this.

Noting that there are expectations that the steps taken by the central banks, especially the US Federal Reserve (Fed) in the fight against inflation, will either slow down or stop after a while, Aslanoglu explained that the interest rate hike is also seen as a big risk because it acts inversely with the bond prices.

Aslanoglu said, “Both credit risk and the possibility of a decrease in interest rate risk have increased the risk appetite in the markets. In this framework, we have seen a decline in CDSs in Turkiye and many countries.”

Trade relations between Russia and Turkiye are among the factors that reduce the risk premium.

Mentioning the developments in some risks specific to Turkiye, Aslanoglu said:

“The deepening of the Russia-Ukraine war is also something that negatively affects Turkiye’s CDS. In that sense, I think that factors such as the opening of the grain corridor, the continuing economic and commercial relations between Russia and Turkiye, and its support for growth were factors that reduced the risk premium. To some extent, the declines in global commodity prices and energy prices reduce Turkiye’s current account deficit and inflation risk, or at least prevent it from rising, I think, which is an internal factor.

 Evaluating the impact of the news about the transfer of funds from Russia to Turkiye on the country’s CDS, Aslanoglu said, “The increase in the Central Bank reserves also indicates that such a resource is coming from Russia and that it may be possible. Therefore, considering Turkiye’s current reserve requirement, this seems to be a positive factor in my opinion.”

“There was a general optimism in the market in July”

Swissquote Senior Analyst Ipek Ozkardeskaya said that Fed expectations have softened due to the increased likelihood of recession, and that by slowing the worldwide rise of the dollar, the Central Bank can ease the pressure on the Central Bank, which implements a foreign exchange strategy, and this will relieve CDSs.

Ozkardeskaya said, “There was a general optimism in the market in July. From the view that major central banks’ interest rate hikes would cause a recession, it was passed to the view that if there was a recession, interest rate hikes would stop. I think it had an effect on the improvement in risk appetite.”

Ugras Ulku, Head of Emerging Markets European Research Unit at the Institute of International Finance (IIF), headquartered in Washington, said: “The recent decline in CDS for Turkiye and other developing countries reflects market expectations that recession concerns may limit possible interest rate hikes from advanced market central banks. “

“The rally was stronger especially for emerging markets and commodity importers, including Turkiye”

Regis Chatellier, Emerging Market Strategy Director at Oxford Economics, noted that Turkiye’s CDS contracts have also declined over the past two weeks, with the majority of their high yields in emerging markets, as US interest rates have tightened significantly since the mid-June peak.

Stating that the declining CDSs provided a great relief for companies in emerging markets with high external financial needs, Chatellier said that Turkiye still needs to export $5 to $7 billion by the end of the year.

Chatellier pointed out that wheat prices dropped significantly as Ukraine and Russia continued to export in the Black Sea, and emphasized that the rally was stronger especially for emerging markets and commodity importers, including Turkiye.

Bluebay Wealth Management Emerging Markets Senior Strategist Timothy Ash, headquartered in London, said that CDSs of developing countries, including Turkiye, have become more moderate due to global developments in the recent period.

Noting that the market is starting to think that inflation has peaked globally, Ash said that the war in Ukraine will bring Europe closer to recession, which creates less reason for global central banks to raise policy rates.

Pointing out that commodity prices, especially oil and grain, have started to become moderate, Ash noted that this also helped the decline in CDSs.

Source: Trthaber / Translated by Irem Yildiz

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