Foreign investors poured $601 mn into TL Bonds and equities in the week ending on Thursday, 11 January, reversing outflow the week before. These purchases are keeping the stock market afloat, which is suffering a massive erosion of retail interest. Bond yields are declining across the maturity curve, despite 2023 budget deficits reaching 5.4% of expected GDP and a widely anticipate inflation surge in the first half of 2024.
While nagging doubts last about the durability of Mehmet Simsek and CBRT governor Gaye Erkan in their tenure linger, with several Turkish YouTube influencers claiming they will be sacked after end-March local elections, major global funds and investment banks appear to have increasing faith in the economic stabilization program.
Pimco has been wading into Turkey’s bond market, betting that President Recep Tayyip Erdoğan’s commitment to a sweeping economic overhaul has set the country on a path to regaining its investment grade credit rating.
The California-based firm, one of the world’s biggest bond fund managers, has been buying Turkey’s lira-denominated debt since the second half of last year, prompted by Erdoğan’s abrupt change of economic policy after his victory in May’s general election.
“Interest rates have risen substantially, fiscal policy has tightened . . . policymakers continue to unwind unsustainable programmes, encouraging locals to invest back into the lira and away from US dollars . . . these efforts are working,” said Pramol Dhawan, who heads the firm’s emerging markets team.
The fund firm was “very constructive” on domestic Turkish assets, he added, reported Financial Times.
Vanguard, the world’s second-largest money manager with nearly $7.5 trillion, bought Turkish local bonds without hedging late last year after Nick Eisinger, co-head of Emerging Markets Active Fixed Income, and a few other investors visited the country for meetings, according to Reuters.
“It was a bit of a watershed moment,” Eisinger said in a separate interview, noting that benchmark yields later dropped by 500-600 basis points from November to mid-December, before partially rebounding this week.
Bullish forecasts by major investment banks about dollar/TL and inflation underpin growing optimism about Turkish markets. Recently, JP Morgan upgraded its year-end 2024 dollar/TL forecast to 36, implying a 20% currency depreciation for the year. At this rate of depreciation, TL denominated government bonds are very lucrative on carry basis.
On Tuesday, Goldman Sachs Group Inc. economists made a contrarian case for a steep slowdown in Turkish inflation, setting the Wall Street firm apart not just from global peers but also the country’s own central bank, according to Bloomberg.
The argument hinges on the idea that money growth — and not interest rates or the economy’s output gap — is “the most useful indicator” for projecting inflation in periods of fast price increases. With that in mind, Goldman now sees Turkish inflation ending this year “slightly below” 30%, the lowest of the forecasts compiled by Bloomberg and 6 percentage points less than predicted by the monetary authority.
“Given the speed with which the Turkish central bank has curtailed the growth of monetary aggregates, we think inflation will fall significantly faster than consensus expects,” Goldman economists Basak Edizgil and Clemens Grafe said in a report this week.
Others claim, along with most Turkish economists that CBRT hiking cycling will end at 45% in January MPC meeting, with rate cuts lined up for the second half or the last quarter of 2024.
You add a relatively stable currency, falling inflation and looser monetary policy on the horizon, and no wonder foreign interest in Turkish assets is picking up.
If Erdogan scores yet another victory in end-March municipal elections, he will probably have more leeway in granting economy czar Mehmet Simsek the authority to tighten the screws on the ongoing economic stabilization efforts.
All is not going well, for Turkey’s economy program, though. Energy shocks emanating from the widening Middle East crisis, disturbing allegations of nepotism by Gaye Erkan and a horrendous budget deficit which is inflationary cast a long shadow on Turkish assets.
At the end, time solves most problems, and if Erdogan doesn’t fire Mehmet Simsek and Gaye Erkan after local elections, bets by brave foreign fund managers on Turkish economy will bear fruit.
By Atilla Yesilada
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