20181031-法国巴黎银行-TURKEY__Take_profits_on_short_5y_CDS_strategy_10页_489kb

Summary of the BNP Paribas Emerging Markets Trade Idea on Turkey

Core Content

This document presents a trade idea from BNP Paribas regarding Turkey's 5-year Credit Default Swap (CDS) based on a newly developed CDS model for emerging markets. The trade recommendation involves taking profits on a short position in USDTRY (U.S. Dollar/Turkish Lira) CDS, as the model suggests that the current level of Turkey's 5y CDS is at fair value.

Key Messages

• Trade Recommendation: Take profits on the short 5y CDS strategy for Turkey.
• P&L: The trade has generated a profit of +42 basis points (bps) or USD 485,000.
• Model Insights: The CDS model incorporates three key variables: domestic debt dynamics, U.S. real interest rates, and the spread between BAA-rated U.S. corporates and U.S. Treasury yields.
• Fair Value: The model results suggest that Turkey's 5y CDS is currently at fair value, indicating that the credit risk has been adequately priced.
• Debt Dynamics: The analysis highlights the importance of considering real interest rates, real GDP growth, and currency depreciation in assessing debt sustainability.

Main Viewpoints

• Debt Sustainability Framework: The document introduces a framework for assessing debt sustainability that goes beyond traditional fiscal indicators like debt-to-GDP ratio and fiscal deficit. It emphasizes the role of real interest rates, real GDP growth, and exchange rate movements.
• Two Scenarios for Debt Dynamics:
  • Benign (r < g): Debt-to-GDP ratio converges to a steady state, even with a positive primary deficit.
  • Unstable (r > g): A primary surplus is necessary to stabilize the debt-to-GDP ratio.
• Equation for Debt-to-GDP Evolution:
  $$
  \Delta b = d + (r - g) \times b + s
  $$
  Where:
  • $d$: Primary deficit as a proportion of GDP
  • $r$: Real interest rate
  • $g$: Real GDP growth
  • $b$: Current debt-to-GDP ratio
  • $s$: Seigniorage
• Turkey-Specific Analysis:
  • The CDS model is used to approximate the theoretical level of Turkey's 5y CDS.
  • The equation used is:
    $$
    CDS , 5y , t = y = \theta + \lambda , debt , dynamics , indicator , t + US , real , interest , rates , t + \mu , BAA , Corp , t + \varepsilon , t
    $$
  • Coefficients are statistically significant at 1% and have the expected signs.
  • $R^2 = 0.73$, indicating a strong explanatory power of the model.
• Impact of FX and Currency Mismatch:
  • The model does not account for foreign currency denominated debt (FCD) and its impact on the debt-to-GDP ratio due to currency depreciation.
  • A high share of FCD increases balance sheet risks, particularly in the context of the Lira's depreciation.
• Current Outlook:
  • The analysis suggests that real GDP growth might turn negative, and the full impact of higher real interest rates in Q1-Q3 2018 will be reflected in the debt-to-GDP ratio.
  • This could lead to a rise in the debt-to-GDP ratio, which may impact credit risk and CDS levels.

Key Information

• Model Used: A new CDS model for emerging markets that incorporates real interest rates, real GDP growth, and exchange rate dynamics.
• Data Sources: Bloomberg, BNP Paribas, and IMF.
• Assumptions: The model assumes a standardised formula and does not consider all factors, such as FX depreciation effects or currency mismatch.
• Legal Disclaimer:
  • This document is non-independent research and may be subject to conflicts of interest.
  • It is intended for professional clients and eligible counterparties under MiFID II.
  • It is not investment research and should not be relied upon as an authoritative source.
  • The document may contain simulated performance data and is for informational purposes only.

Conclusion

The analysis concludes that Turkey's 5y CDS is at fair value, and the trade recommendation is to take profits on the short position. The model suggests that the country's debt dynamics are becoming more stable, but the potential for real GDP growth to turn negative and the impact of higher real interest rates remain key risks. The trade idea is based on a combination of debt sustainability indicators and market analysis, and is subject to the legal and regulatory disclaimers provided.