Republic of Turkey Undersecretariat of Treasury DEBT MANAGEMENT OF - PowerPoint PPT Presentation

Republic of Turkey Undersecretariat of Treasury DEBT MANAGEMENT OF TURKEY ‘Choosing between USD or EUR- denominated debt in the international markets’ K. Çağatay İMİRGİ Deputy Director General Foreign Economic Relations October 19, 2016

Public Deficit & Debt Fiscal position is Turkey’s main anchor… Central Government Deficit (% of GDP) EU Defined Public Debt (% of GDP) 80 10 8.8 9 67.7 70 8 Maastricht Criteria: 60% 59.6 7 60 5.5 52.7 6 5.2 50 5 46.5 46.0 3.6 42.3 4 39.9 40.0 39.1 40 36.2 36.1 33.5 32.9 32.8 3 1.6 1.8 2.1 1.2 1.6 1.4 1.3 2 1.2 1.1 30 0.6 1 0 20 2016E 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 E: Realization Estimate, Medium Term Program 2017-2019 Source: Undersecretariat of Treasury, MoF, MoD, TURKSTAT, IMF 2

Debt Management Office Structure Deputy Prime Minister Debt and Risk Management Committee Undersecretary of Treasury Strategic Benchmarks Strategic Benchmark Front Offices Proposals Middle Office Back Office 3

Strategic Benchmarks: The direction we would like to move Domestic Borrowing: Reduce currency risk: • borrow only in TRY  Reduce interest rate risk: • use fixed rate instruments as the major source of domestic borrowing  Reduce liquidity risk: • maintain a certain level of cash reserve  Reduce refinancing risk: • increase the average maturity of domestic cash borrowing  External Borrowing: Diversification: • expand investor base  diversify borrowing instruments  4

Annual Domestic & External Borrowing (Billion TL) 200 175 14.9 150 13.5 11.3 17.7 125 9.3 13.6 100 10.9 7.5 159.0 75 141.2 138.9 127.9 111.7 50 101.5 96.3 90.4 25 0 2008 2009 2010 2011 2012 2013 2014 2015 Domestic Borrowing External Borrowing Source: Undersecretariat of Treasury 5

Composition of Central Government Gross Debt (%) 100 5.7 8.5 11.2 12.4 14.3 14.5 14.7 16.4 16.5 17.3 17.7 75 37.3 18.3 28.4 25.9 22.1 38.0 32.8 50 68.2 67.6 65.2 61.5 59.8 59.2 57.0 56.0 53.4 25 0 2016 Aug. 2008 2009 2010 2011 2012 2013 2014 2015 Fixed Floating Indexed to CPI Source: Undersecretariat of Treasury 6

Currency Composition of Central Government Debt (%) 100 26.7 27.3 29.1 29.6 31.3 31.2 32.3 33.8 35.0 35.5 37.2 37.6 41.5 46.3 75 50 73.3 72.7 70.9 70.4 68.7 68.8 67.7 66.2 65.0 64.5 62.4 62.8 58.5 53.7 25 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 August TL Foreign Exchange Source: Undersecretariat of Treasury 7

Domestic & External Sources of Financing Domestic Financing External Financing • • TL Denominated Issuances: USD Denominated Eurobonds (SEC Registered - 21 Outstanding) • Fixed Coupon Bonds (2, 5, 10 years) • • Zero-coupon Bonds (up to 2 years) EURO Denominated Eurobonds (SEC • Floating Rate Note (7 years) Registered - 5 Outstanding) • CPI Indexed G. Bond (5, 10 years) • Lease Certificates (144A /REGS – 4 • Treasury Bill (shorter than 1 year) Outstanding) • Lease Certificates (2 years) • Samurai Bonds (4 Outstanding) • CPI Indexed Lease Certificates (5 years) • Other Alternatives • No FX issuance since 2010 • CHF? • MYR? • Panda? • Green Bond? 8

Treasury Financing Program 9

External Market Activities $, billion 8 7 1.0 1.5 1.5 6 0.9 1.50 2.7 2.5 1.1 5 1.0 0.2 2.0 1.4 1.4 4 1.7 1.6 2.2 3 5.5 4.5 4.5 2 4.0 4.0 4.0 4.0 3.9 3.8 3.8 3.0 3.0 3.0 1 2.0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* USD Euro (USD Equivalent) Yen (USD Equivalent) Lease Certificate (USD) (*) As of October, 2016 Source: Undersecretariat of Treasury 10

Currency Composition of Eurobond and Sukuk Debt Stock (*) As of October, 2016 Source: Undersecretariat of Treasury 11

Investor Composition of Debt Stock Eurobond and Sukuk Debt Stock Domestic Debt Stock (*) As of September, 2016 Source: Undersecretariat of Treasury, BRSA 12

External vs. Domestic Borrowing Why we issue international bonds despite the deep domestic market? Finance current account deficit • Turkey is a CAD producing country  The Treasury raises $4.5-6.5 billion each year  Reduce cost • Lower nominal coupons and relative cost advantage  Increase average maturity • Broaden the investor base • Establish a benchmark for private sector • Attract foreigners to the domestic market • 13

External vs. Domestic Borrowing How we decide on share of the external borrowing? Domestic rollover ratio • FX portion of debt stock • Redemption profile • Domestic and external borrowing conditions • Absorption capacity - External market is not unlimited • 14

USD vs. EURO? What we look at: Strategic diversification benefit 1. Relative cost 2. Ease of access to markets – execution risk 3. Liquidity conditions – market backdrop 4. What we don’t look at: Currency expectations – don’t speculate on currency 1. 15

Yield (%) Benchmark Yields -0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 Source: Bloomberg Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 10 Year Government Yields USD 10 Year May-14 Jul-14 Sep-14 Nov-14 Jan-15 EUR 10 Year Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 16

Basis Swaps & Relative Cost Spread (bps) Spread (bps) -60 -50 -40 -30 -20 -10 Source: Bloomberg 100 150 200 250 300 350 400 450 10 50 0 0 Apr-14 Apr-14 May-14 May-14 Jun-14 Jun-14 Difference (RHS) Jul-14 Jul-14 Aug-14 Aug-14 Sep-14 Sep-14 Oct-14 Oct-14 Relative Cost Between USD and EURO Nov-14 Nov-14 Dec-14 Dec-14 10 Year USD-EUR Basis Swaps EUR 2023s USD Equivalent Z-Spread (LHS) Jan-15 Jan-15 Feb-15 Feb-15 Mar-15 Mar-15 Apr-15 Apr-15 May-15 May-15 Jun-15 Jun-15 Jul-15 Jul-15 Aug-15 Aug-15 Sep-15 Sep-15 Oct-15 Oct-15 Nov-15 Nov-15 Dec-15 Dec-15 Jan-16 Jan-16 USD 2024s Z-Spread (LHS) Feb-16 Feb-16 Mar-16 Mar-16 Apr-16 Apr-16 May-16 May-16 Jun-16 Jun-16 Jul-16 Jul-16 Aug-16 Aug-16 Sep-16 Sep-16 Oct-16 17 0 50 100 150 200 250 300 350 400 450 Spread (bps)

Drivers of the Level of Basis Swaps Monetary policy divergence among developed countries •  Investors' demands for USD denominated assets  Corporate FX-hedged Bond Issuance Reduced appetite for arbitrage and decline in liquidity •  Market making activities in US money market Decrease in USD supply from real money investors • 18

Final Thoughts There is a trade-off between diversification and cost. • Keeping investor base engaged pays off in the long run. • Having all options open matters for an EM issuer. • 19

THANK YOU For further information please contact our Investor Relations Office http://www.hazine.gov.tr/link/iro E-mail: iro@hazine.gov.tr Tel: +90 312 204 6217 Fax: +90 312 204 7366