Turkey’s victory against sky-high credit costs

Sitting in the domed and marbled splendour of Istanbul Stock Exchange, Ibrahim Turhan, its chairman and chief executive, remembers the bad old days. Until the beginning of this century, he points out, the country was ravaged by inflation of 90 per cent, high fiscal deficits and crippling interest rates. “When we were talking about the long term at that time, it was just a quarter,” he says.

“The government could only borrow at a cost of 120 per cent, 130 per cent in the domestic market, and the average maturity of the total government stock was a mere four months.”

Things changed after a banking and financial crisis in 2000-2001. The current government, which boasts that per capita gross domestic product has tripled in dollar terms during its decade in office, rarely misses an opportunity to urge its neighbours in the eurozone to follow its example of fiscal discipline.

Ankara has worked hard to manage its debt. The Turkish lira-denominated government bond market has swollen more than sevenfold since 1996, to the equivalent to $208bn by mid-2012, according to the Bank for International Settlements.

It has also become a longer-term market, as inflation has fallen to about 6 per cent and as quantitative easing in developed economies has encouraged a flood of money. Turkey sold its first 10-year lira government bond in January 2010, carrying a coupon of 10.5 per cent. The yield has now declined to 6.6 per cent.

But that is not to say Turkey no longer has debt problems.

Moody’s Investors Service said this week that, to win an investment-grade rating, Turkey would have to take steps such as structurally reducing its current account deficit, which is still more than 7 per cent of GDP and is financed overwhelmingly by relatively fickle portfolio funds. It would also have to reduce bank and corporate external debt, Moody’s said.

Indeed, over the next 12 months the Turkish private sector has $135bn coming due, compared with central bank reserves of about $100bn.