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26 September 2019 by jbchevrel

This week, Turkey has traded with global risk and the 5y CDS is really little changed since the roll last Friday, gyrating around 370bp. The fact that the economy there has grown by 1.2%q in Q2 positively surprised expectations, thus slowing the annual pace of contraction (from -2.4%y in Q1 revised from -2.6%y to -1.5%y). Turkey CDS has logically outperformed peers such as Soaf on the back of that, but it can probably richen more from here. Current account dynamics have tremendously improved, there is no negative catalyst anytime soon on policy side (although the -750bp of cuts in Q3 surely probably heralds more easing ahead -- so better to avoid the period preceding next Oct. 31 CBT), and the yield hunt environment will be supportive of turkey fixed income in general. On the former, the c-a deficit may well stabilise at 1% of GDP this year & next one, so could be constructive at the current 370bp ish. Exports rose +8.1%y from +9.2%y in Q1 and the slowing in imports has eased (-16.9%y from -28.9%y) so basically net exports have added +5.7% to GDP growth. For reference, the current account deficit had peaked at about 7% of GDP in the middle of 2018, around what many refer to as the ‘TRY crisis’. Another very positive development that can be expected going forward is the continued reduction in the private sector leverage. Looking at foreign currency denominated liabilities of the corporate sector, it has fallen by ~$20B over the past 12m and the external debt of banks has also fallen by ~$25B. The mitigant to this brighter private sector picture is the public sector picture, where spending has weighed on budget deficit. Liabilities coming due within next 12m @ ~$180B (~1/4 of GDP). Adding to this mitigant, FX reserves adequacy has not reallyy improved. CBT reserves are ~$75B. CBT net foreign assets are ~$30B. But capital inflows, which have been weakish YTD as the ‘TRY crisis’ is still in all memories, may well pick up in the coming quarters. The boost to GDP going forward may well come from investment, in a yield hunt environment where 10y T 170 Bund -60. The contraction in investment had not improved in Q2. It actually worsened (from -12.4%y to -22.8%y since Q1) across sectors (construction -29.2%y machinery -16.5%y etc). Adding to that, with inflation supposedly under control, in good part thanks to the ‘FX-passthru-induced’ virtuous circle, household spending is likely to keep resilient. Why would it not be. It was stable in Q2, just a tad down -1.1%y, so better than what the Bloomberg consensus had built, on the back of higher frequency indicators (credit growth, d-g sales, cons. goods imports, cons. confidence index, etc).