Republic of TurkeyUndersecretariat of Treasury

DEBT MANAGEMENT OF TURKEY

‘Choosing between USD or EUR-denominated debt in the international

markets’

K. Çağatay İMİRGİDeputy Director General

Foreign Economic Relations

October 19, 2016

8.8

5.2

1.10.6

1.61.8

5.5

3.6

1.42.1

1.2 1.3 1.2 1.6

0123456789

10

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

E

Central Government Deficit (% of GDP)

Source: Undersecretariat of Treasury, MoF, MoD, TURKSTAT, IMF 2

E: Realization Estimate, Medium Term Program 2017-2019

67.7

59.6

52.746.5

39.9 40.046.0

42.339.1

36.2 36.133.5 32.9 32.8

20

30

40

50

60

70

80

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

E

EU Defined Public Debt (% of GDP)

Maastricht Criteria: 60%

Public Deficit & Debt

Fiscal position is Turkey’s main anchor…

3

Debt and Risk Management

Committee

Deputy Prime Minister

Front Offices

Middle Office

Undersecretary of Treasury

Back Office

Strategic Benchmark Proposals

Strategic Benchmarks

Debt Management Office Structure

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

Source: Undersecretariat of Treasury 5

Annual Domestic & External Borrowing

96.3

138.9159.0

111.7101.5

141.2127.9

90.4

10.9

11.3

14.9

9.313.6

13.517.7

7.5

0

25

50

75

100

125

150

175

200

2008

2009

2010

2011

2012

2013

2014

2015

Domestic Borrowing External Borrowing

(Billion TL)

6

Composition of Central Government Gross Debt (%)

57.0 53.4 56.0 59.2 59.8 61.5 65.2 67.6 68.2

37.338.0 32.8 28.4 25.9 22.1 18.3 17.7 17.3

5.7 8.5 11.2 12.4 14.3 16.4 16.5 14.7 14.5

0

25

50

75

10020

08

2009

2010

2011

2012

2013

2014

2015

2016

Aug

.

Fixed Floating Indexed to CPI

Source: Undersecretariat of Treasury

777

53.7 58.5 62.4 62.8 68.7 66.2 70.9 73.3 70.4 72.7 68.8 67.7 65.0 64.5

46.3 41.5 37.6 37.2 31.3 33.8 29.1 26.7 29.6 27.3 31.2 32.3 35.0 35.5

0

25

50

75

10020

03

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Aug

ust

TL Foreign Exchange

Currency Composition of Central Government Debt (%)

Source: Undersecretariat of Treasury

8

Domestic & External Sources of Financing

Domestic Financing

• TL Denominated Issuances:

• Fixed Coupon Bonds (2, 5, 10 years)

• Zero-coupon Bonds (up to 2 years)

• Floating Rate Note (7 years)

• CPI Indexed G. Bond (5, 10 years)

• Treasury Bill (shorter than 1 year)

• Lease Certificates (2 years)

• CPI Indexed Lease Certificates (5 years)

• No FX issuance since 2010

External Financing

• USD Denominated Eurobonds (SEC

Registered - 21 Outstanding)

• EURO Denominated Eurobonds (SEC

Registered - 5 Outstanding)

• Lease Certificates (144A /REGS – 4

Outstanding)

• Samurai Bonds (4 Outstanding)

• Other Alternatives• CHF?

• MYR?

• Panda?

• Green Bond?

9

Treasury Financing Program

10

External Market Activities

3.9 3.8 4.05.5

3.04.0 3.8 4.0

2.0

4.53.0

4.03.0

4.5

1.4 2.02.5

1.5

1.6

2.7

1.7

1.4

2.2

1.1 0.2

0.91.5

1.50

1.0

1.0

0

1

2

3

4

5

6

7

8

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

$, billion

Source: Undersecretariat of Treasury

11

Currency Composition of Eurobond and Sukuk Debt Stock

(*) As of October, 2016

Source: Undersecretariat of Treasury

12

Investor Composition of Debt Stock

(*) As of September, 2016

Source: Undersecretariat of Treasury, BRSA

Domestic Debt Stock Eurobond and Sukuk Debt Stock

External vs. Domestic Borrowing

13

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

External vs. Domestic Borrowing

14

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

USD vs. EURO?

15

What we look at:

1. Strategic diversification benefit

2. Relative cost

3. Ease of access to markets – execution risk

4. Liquidity conditions – market backdrop

What we don’t look at:

1. Currency expectations – don’t speculate on currency

Benchmark Yields

16

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50Ja

n-13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-

14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep-

16

Yiel

d (%

)

USD 10 Year EUR 10 Year

10 Year Government Yields

Source: Bloomberg

Basis Swaps & Relative Cost

17

-60-50-40-30-20-10

010

Apr-

14M

ay-1

4Ju

n-14

Jul-1

4

Aug-

14

Sep-

14O

ct-1

4

Nov

-14

Dec-

14Ja

n-15

Feb-

15M

ar-1

5

Apr-

15M

ay-1

5

Jun-

15Ju

l-15

Aug-

15

Sep-

15O

ct-1

5

Nov

-15

Dec-

15

Jan-

16Fe

b-16

Mar

-16

Apr-

16M

ay-1

6

Jun-

16Ju

l-16

Aug-

16Se

p-16

Spre

ad (b

ps)

10 Year USD-EUR Basis Swaps

Source: Bloomberg

050100150200250300350400450

050

100150200250300350400450

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

Sep

-16

Oct

-16

Spr

ead

(bps

)

Spr

ead

(bps

)

Difference (RHS) EUR 2023s USD Equivalent Z-Spread (LHS) USD 2024s Z-Spread (LHS)

Relative Cost Between USD and EURO

Drivers of the Level of Basis Swaps

18

• 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

Final Thoughts

19

• 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.

THANK YOU

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