Turkish government plans to boost pension savings by matching 25 percent of contributions looks set to boost the market for corporate bonds, according to HSBC Holdings Plc.
Prime Minister Recep Tayyip Erdogan’s administration is aiming to reverse a drop in national savings with incentives that also include cutting the fees fund-management companies are allowed to charge and allowing interest-free instruments to be included in pension portfolios, to comply with Islamic restrictions. Private pension industry assets have increased 7 percent to 22 billion liras ($12 billion) since the introduction of the incentives in January, and they’re expected to grow about 30 percent this year, according to Mehmet Bostan, chairman of the Istanbul-based Pension Monitoring Center.
“As the institutional investor base develops with the new pensions incentives, the market is bound to pick up,” Selim Kervanci, head of global banking in Turkey for HSBC, said in an interview by phone from Istanbul yesterday.
Turkish companies have sold 700 million liras ($385 million) of domestic bonds this year, double the amount for the whole of last year, according to data compiled by Bloomberg. The average yield on Turkish corporate bonds was 4.7 percent yesterday, down from 5.7 percent a year ago and below the 4.9 percent average for emerging market countries, according to JPMorgan Chase & Co. CEMBI indexes.
Standard & Poor’s upgraded Turkey’s credit rating to BB+ on March 27, bringing its rating in line with Moody’s Investors Service at one level below investment grade. Fitch Ratings raised Turkey to investment grade on Nov. 5.
Euroclear Bank SA, operator of the world’s biggest bond settlement system, is in negotiations with Turkish authorities to expand access to the country’s bond market. Access via Euroclear “may provide an additional level of comfort to international investors to contemplate investing in Turkish corporate bonds,” Stephan Pouyat, the company’s head of global reach product management in Brussels, said in an e-mailed response to Bloomberg yesterday.
The yield on June 2013 lira bonds of Otokoc Otomotiv Ticaret ve Sanayi AS, a unit of Koc Holding AS (KCHOL), Turkey’s largest group of companies, plunged to 6.3 percent yesterday from 10.2 percent at the time of the sale last June, according to data compiled by Bloomberg. Similar-maturity lira bonds of lender Akbank TAS, part-owned by Citigroup Inc., (C:US) traded at 7.4 percent, according to the data.
“The lower interest rate environment makes the cost of bond issuance fairly reasonable for corporates,” Gonca Gursoy Artunkal, the chief executive officer of UBS Securities in Istanbul, a unit of UBS AG, Switzerland’s largest bank, said in e-mailed comments on March 27. “There’ll be more blue-chip corporates coming into the market this year.”
Turkey’s policy makers have lowered at least one of their key interest rates at each of the seven monetary policy meetings since Sept. 18. The average cost of central bank funding to Turkish banks was 5.5 percent yesterday, down from as high as 10.8 percent in May last year.
Koc Finansman, another unit of Turkey’s largest conglomerate Koc Holding, said in a statement to Istanbul Stock Exchange on March 26 that it plans to sell 290 million liras in bonds. Istanbul-based drugmaker Deva Holding AS said on March 22 it will seek permission from the regulator to sell as much as 100 million liras of three-year debt to domestic investors.
Yields on Turkey’s benchmark two-year government notes have dropped by 310 basis points in the past 12 months, the largest decrease among 18 emerging markets tracked by Bloomberg. Benchmark two-year bonds fell 7 basis points to 6.34 percent yesterday.
The extra yield investors demand to hold Turkey’s dollar-denominated sovereign bonds rather than U.S. Treasuries fell three basis points to 228 basis points, 70 basis points below the average for 59 emerging market countries, according to JPMorgan’s EMBI Global Diversified index.
The Turkish lira gained 0.1 percent to 1.8108 per dollar at 5:40 p.m. in Istanbul yesterday. The currency has retreated 1.5 percent this quarter, headed for its worst performance since the fourth quarter of 2011.
Five-year credit-default swaps on Turkey rose nine basis points to 149, compared with 166 for Russia and 181 for South Africa. The contracts, which increase as perceptions of creditworthiness deteriorate, pay the buyer face value in exchange for the underlying securities or cash equivalent if a borrower fails to adhere to its debt agreements.
“Medium-term policies will gradually address Turkey’s low structural savings rate,” S&P said in a statement accompanying its upgrade of Turkey on March 27. The savings rate was at 12 percent of gross domestic product last year, International Monetary Fund data show, compared with 29 percent for Russia, 16 percent for Poland and 20 percent for Hungary,
The boost to Turkey’s pension system may add 500,000 participants to the system this year, bringing it to almost four million people, according to the Pension Monitoring Center.
“The corporate bond market is nascent,” HSBC’S Kervanci said. “But as funds expand with the new pensions drive, we will definitely start seeing larger transactions and longer maturities.”
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