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EM debt end-game and Turkey’s fate

7 November 2019

Turkish Treasury placed $2.5 bn debt of 5 year maturity at a yield of 5.7% to compensate for its redemption of $2 bn.  Subscription was buoyant.  According to Russian sources, it also intends to issue ruble-denominated debt, which we find reliable, because next year’s budget projections call for $9.8 bn new FX borrowing. In addition the Treasury has TL299 bn in domestic debt roll-overs compared TL160 bn (estimated) for 2019.


While economy czar Berat Albayrak embellished the 5 year bond issue, paying 5.7% at that maturity is no victory. Harrison Schwartz writing for Seeking Aalpha comments “Remember, borrowers (including sovereign) in emerging markets typically pay a 6%+ rate as opposed to -1% to 2.5% like they do in the developed world. Because their interest expense is higher, EMs are extremely insolvent today compared to DMs where the debt level may be higher”.


This is inherently sensible. For 2020, the  Turkish budget foresees only 8% revenue growth, including from incidentals, but according to the recent Reuters EM survey TL will depreciate 10% against dollar over the interim. That is, Turkey’s slowly rising FX debt burden will become more difficult to service as TL revenue fails to match FX financing costs.  Already interest payments/total budget outlays are projected from 12.2% in 2019 to   12.8%.

In addition, there are contingent liabilities in the form of bad loans stock in bank balance sheets, which are very difficult to make whole and several contractors and consortium operators making losses on PPS, trying to sell stakes. It is foreseeable that the Treasury will have to assume some of the PPP contracts, because he has issued sovereign guarantees for them.

Turkey’s fiscal profligacy would be something we can all ignore if it was just temporary pump priming, or in response to a sudden demand shock. But an economist, who wished to remain anonymous wrote to PA Intelligence:

“With total revenue expected to decline in 2020 (as the dramatic drop in non-tax revenue is only partially compensated by the increase in tax revenue, the 2020 budget math seems to rely on a fairly dramatic reduction in primary expenditures as a percent of GDP – to 19.5% from an estimated 20.8% this year. But that is almost impossible to deliver, against the  backdrop of a weak economy, a very rigid expenditure structure (heavily driven by transfer and personnel spending) and a long track-record of expenditure overruns, which, if anything, appears to have worsened in recent years.


And the end game


We refer once again to Harrison Schwartz:


In a matter of days, Lebanon went from an “economic growth success story” to a creditor’s nightmare. The moment the government tried to raise taxes to help repay its monstrous 150% debt to GDP, the people went to the streets and the PM was almost immediately forced to resign.


After that (i.e. today), mass protests broke out across Chile and almost all of Latin America with excessive debt burdens being a primary grievance. After issuing a dollar-denominated 100-year bond at 8% in 2017, Argentinians abandoned their pro-business centrist leader for a Peronist one whose party is historically famous for defaulting. Roughly a quarter of EMB is in Latin American sovereign debt.


We are also seeing recent anti-government protests in Egypt, Azerbaijan, Indonesia, and many others, all of whom’s government EMB is directly invested in. Quite frankly, the few countries EMB is invested in where there are few anti-government protests are the likes of China, Saudi Arabia, Turkey, and Brazil where governments go to great lengths to stop protests before occurring.

While much of the debt is sovereign, it is likely that private debt is an even bigger problem, but those numbers are not publicly available. Frankly, there is little difference between public and private debt. If households begin to default, the government will struggle and often assumes the debt as the U.S. government did in 2008. Total EM debt was estimated to be upwards of $250 trillion in 2018. Of course, the $15 trillion dollar EM sovereign debt is problematic in itself. It is also worth pointing out that EM debt issuance has been hitting new highs this year.


Investors and Wall Street, in general, seem to be largely oblivious to these facts. Over the last two months, it has been made absolutely clear that whenever an emerging market government wants to pursue even slight austerity to repay the debt EMB owners have lent, the taxpayers run to the streets. This has already caused numerous leaders to be removed from office.


In other words, it is highly unlikely that this debt will be repaid in-full unless it is lent only to non-democratic governments that can suppress all protests.



By Atilla Yesilada


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