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Ups and Downs

16 April 2019 by jbchevrel

Today Turkey CDS outperformed EM sovereign space, tightening by 22bp vs 2.5bp for CDX EM and 3.3bp for its fair value. The headline *TURKEY IN TALKS WITH RAYTHEON TO BUY PATRIOT SYSTEM, KALIN SAYS helped TRY and thus CDS get firmer. For reference, Turkey had rejected a U.S. proposal to deliver one Patriot missile defense system on March 1st. That was conditional on Turkey abandoning the S-400 deal with Russia, and was the #1 driver of Turkey CDS lately, and the recount of Istanbul vote seems clearly behind, for now. Looking ahead. The CBT will hold its next meeting on next Thursday (April 25). It is (very) likely to leave rate @ 24%. Historically. The CBT prefers to keep real rate as close to 0% as possible (interest rates are neither halal nor inflation-reducing, as President Erdogan often noted), except when TRY sharply depreciates and/or when financial stability is threatened. Meaning we would need to see TRY keep stable and inflation moderate before CBT starts cutting. Inflation has slowed (c20% from c25% in Q4-18) esp. goods (c20% from c30% in Q4-18) but inflation expectations remain high (12m 15% 24m 12%) far higher than the permanent regime averages of c5% in 2013-17. CBT expects c15% by EOY and 2 upside risks remain: 1/ TRY weaker on geopolitical/macro 2/ commodity prices going higher. Also, lately CBT responded to TRY weakness by closing 1-week (1W) repo facility (25 March - 5 April) providing TRY funding @ O/N 25.5% instead of 1W 24%. How to temporarily hike by 150bp at no political cost. That technique is likely to come back on the table before any actual hike (Political bar higher. CBT not as independent as the Fed. Bad example). Interestingly one bank got TRY3B ($520M) from the CBT via the late liquidity window yesterday. Meaning it cost them 27% vs policy 24%. To be continued…