Turkey's 5-year credit risk premium falls to its lowest level

This week, the CBRT will also announce its interest rate decision. This decline in the credit risk premium (CDS) should, of course, be read as a result of our new post-election path and determined stance in interest rate and fiscal policy.

Last week, Mehmet Şimşek drew attention to the falling CDS premiums in his presentation at the Gulf Cooperation Council-Turkey Economic Forum. Although it is an achievement for this figure to fall below the 340 level, especially after the peak levels seen in 2022, our credit risk premium had almost never exceeded 300 basis points until the summer of 2018.

In short, if we continue to take determined steps with the right policies, it seems quite possible for our credit risk premium to fall below 300 basis points and remain there. Since the decline in the credit risk premium reduces funding costs, this means lower interest payments on country and corporate debt and is considered quite positive. The decline in a country's credit risk premium affects corporate interest payments and is also taken into account in their valuations.

On the other hand, since investing in a country considered less risky is more acceptable from the perspective of foreign investors, it could also be a way for foreign investors to return to the stock market.

HOW ARE THE EFFECTS OF CDS ON THE STOCK MARKET SEEN?

Credit risk premiums represent borrowing costs for companies. While profitability and investment appetite are positively affected when borrowing costs are low, a scenario with high costs leads to pressure on profitability and a more hesitant outlook regarding new investments. This is directly reflected in balance sheets, which we see as the most important factor affecting stock prices in the market. In summary, we can think that an upward trend in CDS premiums can create a negative effect, while a downward trend can create a positive effect.

On the other hand, CDS values are among the critical criteria considered by both individual and institutional investors globally. While investing in countries with high risk creates hesitation, being an investor in low-risk countries is more attractive. The decline in CDS, which could be a positive catalyst for the long-debated and anticipated dilemma of 'when will foreign investors turn to Borsa Istanbul,' continues to create excitement and a new story in this sense.

MAIN SECTORS POSITIVELY AFFECTED

The insurance sector is positively affected by the decline in CDS as it evaluates its revenues in Eurobonds. The banking sector emerges as another sector positively affected by the decline in CDS due to the improvement in borrowing costs.

WHAT IS CDS?

Actually a type of insurance system, CDS (Credit Default Swap) can also be expressed as a credit risk premium. It is a type of insurance system because when you lend to a country's treasury or a company, the insurance policy you take out against the possibility of the debt not being repaid is actually a CDS; therefore, the higher the risk foreseen for that country, the higher the insurance policy, which is the CDS. Conversely, as the risk decreases, the CDS also falls.

AN EXAMPLE:

There is a 1% insurance cost for every 100 points in the credit risk premium. This means that if a country's CDS score is 700, an institution that wants to invest in that country incurs a 7% cost while insuring its money. If the CDS falls to the 340 level, the institution's cost also falls to 3.4%.

News Source: 12punto