The Turkish Treasury & Finance Ministry, beleaguered by the country’s deteriorating fiscal and macro-economic fundamentals on the back of the impact of COVID-19, continued to tap the domestic Sukuk and bond market with the occasional foray into the US dollar and Euro markets, to narrow the gap in the country’s public finances.
Turkey in this respect is following Saudi Arabia, Malaysia, Bahrain, Nigeria, Dubai and Indonesia, all of which have substantially increased their public debt fund raising mainly through domestic Sukuk issuance, some related to COVID-19 mitigation policies and others to the ongoing government programmes including infrastructure financing.
Data compiled by Mushtak Parker from official Treasury figures shows that Turkey has raised the equivalent of US$7,828.952 million in the first seven months of 2020. These include TRY35,819.51 million (US$4,850.11 million) through Turkish Treasury Lease Certificates (Sukuk Al-Ijarah); US$2,427.292 million through Turkish Treasury US Dollar-denominated Lease Certificates; and €488.464 million (US$551.55 million) through Turkish Treasury Euro-denominated Lease Certificates respectively.
In addition, the Ministry also issued Turkish Treasury Gold-backed Lease Certificates totalling 36,894,600 certificates after collecting 36,894,600.000 1000/1000 grams of gold from investors.
On 21 August 2020, Fitch Ratings revised the Outlook on Turkey’s Long-Term Issuer Default Ratings (IDRs) to Negative from Stable and affirmed the IDRs at ‘BB-‘. The rationale behind the Outlook revision, according to Fitch, reflects a depletion of foreign exchange reserves, weak monetary policy credibility, negative real interest rates, and a sizeable current account deficit partly fuelled by a strong credit stimulus, all of which have exacerbated external financing risks.
“Political pressures, the limited independence of the Central Bank of the Republic of Turkey (CBRT), and a track record of being slow to respond to events, increase the risk that policy is tightened insufficiently, contributing to further external imbalances, market instability, and a more disorderly adjustment,” added Fitch in its August Report.
The Turkish lira has experienced huge volatility depreciating 16% against the US dollar since March on the back of net capital outflows and a worsening trade deficit. The Central Bank has resorted to large currency interventions to defend the lira. Gross foreign exchange reserves (including gold) fell to US$88.2 billion in mid-August from US$105.7 billion at end-2019.
Turkish Treasury data shows that the latest Lease Certificates auctions in some instances were brought forward from their planned calendar dates, indicating the urgency created by a liquidity squeeze in the public finances of the country and of the banking sector, including the participation banks.
The issuance calendar for the May-August 2020 period earmarked further lease certificate auctions in June, July and August. Moreover, the Ministry of Treasury & Finance resorts to a variety of switching/buy-back auctions, tap issuances and public offerings as part of an active debt management strategy.
The Treasury was active in July and August with two auctions comprising domestic issuances of fixed rent rate lease certificates (Sukuk Al Ijarah). On 8 July the Treasury raised TRY1,095.92 million in a Sukuk auction with certificates of a tenor of 2 years maturing on 6 July 2022 and priced at a rental rate of 4.75% with a 6-month rental payment period.
In the second auction on 26 August 2020, the Treasury raised TRY547.50 million with certificates of a tenor of 4 years maturing on 21 August 2024 and priced at a rental rate of 6.80% with a 6-Month rental payment period. For the period January to August 2020, the Treasury raised TRY35,819.51 million (US$4,850.11million) through 10 auctions of fixed rent rate lease certificates.
The usual mantra of the Turkish Treasury when announcing these auctions is “In order to increase the domestic savings, broaden the investor base and diversify the borrowing instruments, TRY denominated fixed rent rate lease certificates will be issue to the banks through direct sale method.”
TURKISH TREASURY LEASE CERTIFICATES
(SUKUK AL IJARAH) ISSUANCES JANUARY-AUGUST 2020
DATE | VOLUME (TRY MILLIONS) | TENOR | MATURITY DATE | RENTAL RATE | RENTAL PAYMENT PERIOD |
29/01/20 | 2,925.98 | 2 YEARS | 26/01/22 | 4.88% | 6 MONTHS |
12/02/20 | 2,204.68 | 2 YEARS | 09/02/22 | 4.89% | 6 MONTHS |
25/03/20 | 600.00 | 2 YEARS | 23/03/22 | 5.33% | 6 MONTHS |
08/04/20 | 1,470.00 | 5 YEARS | 02/04/25 | 1.70% | 6 MONTHS |
29/04/20 | 5,705.20 | 6 MONTHS | 28/10/20 | 3.82% | 6 MONTHS |
29/04/20 | 9,460.10 | 4 YEARS | 25/10/23 | 0.79% | 6 MONTHS |
13/05/20 | 5,353.60 | 6 MONTHS | 11/11/20 | 3.83% | 6 MONTHS |
13/05/20 | 6,456.53 | 2 YEARS | 11/05/22 | 4.70% | 6 MONTHS |
08/07/20 | 1,095.92 | 2 YEARS | 06/07/22 | 4.75% | 6 MONTHS |
26/08/20 | 547.50 | 4 YEARS | 21/08/24 | 6.80% | 6 MONTHS |
TOTAL JAN-AUG 2020 | TRY35,819.51M (US$4,850.11M) |
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SOURCE: COMPILED BY MUSHTAK PARKER FROM DATA FROM THE DEBT OFFICE MINISTRY OF TREASURY & FINANCE, TURKEY August 2020 US$/TRY EXCHANGE RATE ON 02/09/20 FX RATE VOLATILITY VERY MARKED
In another auction on 29th July 2020, the Treasury opted for international currency issuances, raising a benchmark US$500 million through a Sukuk Al-Ijarah (US Dollar-denominated Lease Certificates) with a tenor of 1092 days maturing on 26 July 2023 and priced at a Periodic Rent Rate (6 Months) of 1.50%.
The transaction was conducted by the Central Bank of Turkey Bank via its Auction System under the Central Bank Payment Systems. This brings the total US Dollar-denominated Sukuk Al-Ijarah (US Dollar-denominated Lease Certificates) raised in the January-July 2020 period to US$2,427.292M. In addition, the Treasury also raised €488.464M (US$551.55) in Euro-denominated Lease Certificates in two auctions in the January to July 2020 period.
Turkish banks (both participation and conventional) may also increase their holdings of government securities going forward for reasons other than the reserve and liquidity management purposes as the requirement for them to maintain an asset ratio of at least 100% from 1 May 2020 set in.
According to Fitch Ratings, the move introduced by the Banking Regulation & Supervision Authority to stimulate lending to support the economy amid the COVID-19 pandemic “will force some banks to increase lending at a time when the operating environment has weakened, with heightened risks to borrowers’ repayment capacity and therefore to banks’ credit profiles. Banks failing to meet the target are likely to face a fine based on their ratio shortfall. But many banks will not be affected as they already meet the requirement.”
Some banks with lower asset ratios may be unable to reach the target in such a short timescale purely with loan growth, particularly if customer deposits continue to grow.
“We therefore expect some banks to increase their holdings of government securities or FX swaps with the Central Bank of Turkey (CBT), which count towards the target. Unlike loans, however, these are subject to haircuts in the asset ratio calculation. Purchases of Turkish sovereign debt have already increased since the target was announced,” stressed Fitch.
TURKISH TREASURY FX-DENOMINATED LEASE CERTIFICATES
(SUKUK AL IJARAH) ISSUANCES JANUARY-JULY 2020
DATE | SECURITY | VOLUME SOLD MILLIONS | TENOR | MATURITY DATE | LEASE RATE (TERM) | LEASE PERIOD |
26/02/20 | US DOLLAR DENOMINATED LEASE CERTIFICATES | US$1,100.00M | 728 DAYS | 25/02/22 | 1.75% | 6 MONTHS |
27/05/20 | US DOLLAR DENOMINATED LEASE CERTIFICATES | US$666.403M | 364 DAYS | 28/05/21 | 1.75% | 6 MONTHS |
17/07/20 | US DOLLAR DENOMINATED LEASE CERTIFICATES | US$160.889M | 364 DAYS | 16/07/21 | 1.25% | 6 MONTHS |
29/07/20 | US DOLLAR DENOMINATED LEASE CERTIFICATES | US$500M | 1092 DAYS | 26/07/23 | 1.50% | 6 MONTHS |
TOTAL JAN-JULY 2020 |
| US$2,427.292M |
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12/03/20 | EURO DENOMINATED LEASE CERTIFICATES | €255.71M | 364 DAYS | 12/03/21 | 0.75% | 6 MONTHS |
27/05/20 | EURO DENOMINATED LEASE CERTIFICATES | €232.754M | 364 DAYS | 28/05/21 | 1.25% | 6 MONTHS |
TOTAL JAN-MAY 2020 |
| €488.464M (US$551.55 EQ) |
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SOURCE: COMPILED BY MUSHTAK PARKER FROM DATA FROM THE DEBT OFFICE MINISTRY OF TREASURY & FINANCE, TURKEY August 2020 US$/€ EXCHANGE RATE ON 06/06/20
Similarly, the Debt Office of the Turkish Treasury also issued 1-Year Gold-backed Lease Certificates (Sukuk Ijarah) on 8 July 2020 maturing on 9 July 2021 priced at a Lease Rate of 0.75% payable over the 6 Month lease period. The amount of gold collected, according to the Treasury, amounted to 5,597,870.000 grams of gold (1000/1000 purity) from institutional investors for issuance of an aggregate 5,597,870 gold lease certificates (at a nominal value).
For the January-July 2020 period, the Treasury has conducted five such gold-backed lease certificate auctions in January, March, April, May and July 2020 collecting a total 36,894,600.000 grams of gold (1000/1000 purity) from institutional investors for issuance of an aggregate 36,894,600 gold lease certificates (at a nominal value).
All the lease certificates were issued by Hazine Mustesarligi Varlik Kiralama A.S., a wholly-owned special purpose vehicle owned by and on behalf of the Ministry of Treasury & Finance, the obligor.
TURKISH TREASURY GOLD-BACKED LEASE CERTIFICATES
(SUKUK AL IJARAH) ISSUANCES JANUARY-JULY 2020
DATE | COLLECTED GOLD 1000/1000 GRAMS | NUMBER OF GOLD LEASE CERTIFICATES ISSUED | TENOR | MATURITY DATE | LEASE RATE (TERM) | LEASE PERIOD |
30/01/20 | 14,578,740.000 | 14,578,740 | 728 DAYS | 31/02/22 | 0.38% | 6 MONTHS |
04/03/20 | 7,514,240.000 | 7,514,240 | 364 DAYS | 05/03/21 | 0.50% | 6 MONTHS |
15/04/20 | 6,738,140.000 | 6,738,140 | 364 DAYS | 16/04/21 | 0.75% | 6 MONTHS |
13/05/20 | 2,465,610.000 | 2,465,610 | 364 DAYS | 14/05/21 | 0.75% | 6 MONTHS |
08/07/20 | 5,597,870.000 | 5,597,870 | 364 DAYS | 09/07/21 | 0.75% | 6 MONTHS |
TOTAL | 36,894,600.000 | 36,894,600 |
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SOURCE: COMPILED BY MUSHTAK PARKER FROM DATA FROM THE DEBT OFFICE MINISTRY OF TREASURY & FINANCE, TURKEY August 2020
The Ministry of Treasury & Finance issues these gold-backed lease certificates “to diversify borrowing instruments, broaden the investor base and bring the idle gold into the economy.”
According to Finance Minister Berat Albayrak “citizens are provided with a safe investment tool for their gold savings. With the gold bond and gold-denominated lease certificate issuance through five banks, our citizens will both win themselves and contribute to the national economy.”
The investors will be paid TL-denominated returns on a semi-annual basis indexed to the gold price. On maturity, according to the Ministry of Finance, investors may request the principal payment as 1 kilogram of gold bar (produced by refineries) or Republic Gold Quarter Coins printed by the Turkish State Mint.