Turkish debt market buoyed by improved investor sentiment: Fitch

LONDON

Sovereign financing, funding diversification goals and the Islamic finance development agenda will continue to drive Turkish debt capital market (DCM) issuance over the next two years, according to Fitch Ratings.

“We expect banks and corporates to keep a smaller DCM share than sovereigns, with issuance mostly opportunistic, given still-high costs,” the rating agency said in a report, adding that in the medium term, DCM will likely cross $450 billion outstanding, with sukuk to cross 20 percent of the issuance mix.

In March, Fitch upgraded Türkiye's Long-Term Foreign-Currency Issuer Default Rating to “B+'” from “B” with positive outlook. On May 3, Standard & Poor’s raised Türkiye’s ratings to "B+" from "B," citing economic rebalancing. Moody’s raised Türkiye’s outlook to positive in January.

The recent revival in foreign currency debt issuances signals lower near-term refinancing risks as investor sentiment improves following Türkiye’s adoption of more conventional macroeconomic policies, said Bashar Al Natoor, Global Head of Islamic Finance at Fitch.

With over $225 billion external debt maturing in the next 12 months as of December 2023, Türkiye has always been vulnerable to shifts in investor sentiments, although the sovereign and private sector have proved resilient in their ability to access external financing, he added.

Türkiye issued $10 billion in external markets in 2023, with a similar amount planned for 2024, according to Fitch. It issued a $3 billion bond in February 2024, with the lowest spread of the past four years, the rating agency said, noting that rated banks and corporates have shown signs of returning to the market since the second half of 2023.

The Turkish DCM grew 8 percent as of the end of the first quarter of 2024 — $422.6 billion outstanding, with almost two-thirds in Turkish Lira, a third in U.S. dollars and the remainder in euros, according to Fitch.

Türkiye is the fourth largest sukuk issuer globally, and one of just three G20 countries active in the sukuk market. Fitch rates 90 percent of Turkish U.S. dollars, sukuk.

The European Bank for Reconstruction and Development (EBRD) said in in its regional economic report released on May 15 that return to more orthodox economic policies helped improve confidence among domestic and international investors, as witnessed by the significant decline in Türkiye’s CDS premium since its peak in May 2023.

Economic growth is expected to slow further in 2024, to 2.7 per cent before picking up to 3 per cent in 2025, as the tighter fiscal and monetary stance cools down the economy and private consumption growth weakens, according to EBRD.