For Turkey’s Investors, 2024 Is Still All About Winning Trust
(Bloomberg) — It’s been another volatile year for Turkish assets, buffeted by President Recep Tayyip Erdogan’s re-election campaign and then rapid hikes in interest rates to battle double-digit inflation. Now investors want to see if policy will stick and what 2024 will bring.
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After years of advocating lower rates to hold prices down, Erdogan installed a new economic team in June filled with market-friendly names who promised a return to more orthodox policies. Mehmet Simsek, an ex-Merrill Lynch strategist, became finance minister while Hafize Gaye Erkan, a former Wall Street banker, was named central bank governor.
Those appointments sparked optimism which swept through Turkish markets. Dollar bonds and stocks gained, while five-year credit default swaps — a key gauge of country risk — fell by more than 250 basis points. Now a raft of big-name investors, including Deutsche Bank AG and JPMorgan Chase & Co., are betting on a turnaround for Turkish bonds next year.
“After the unorthodoxy of the past five years, markets remain fixated on whether and how Turkey will get it right,” said Murat Gulkan, the chief executive officer at OMG Capital Advisors. In the short term, he said, “nothing else matters.”
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Skepticism is still evident in the currency market, however, with the lira sliding 35% against the dollar this year. While more than half of that drop came before the new economic team took office, the currency has eroded further since then. Inflation, while down from a peak of 86% in October last year, is still running at an annual 62%.
It’s not the first time during Erdogan’s presidency that investors have sought signs of commitment to more orthodox economic policies. Naci Agbal’s stint as central bank governor from November 2020 to March 2021 sparked a lira rally, but he was fired after a series of rate hikes challenging Erdogan’s view that cheap money reduces inflation.
Investors ‘Burned’
So with memories of previous such pivots fresh in foreign investors’ minds, concerns over whether the latest policy flip will last or not still linger. Add to that local elections looming at the end of in March, and there are still plenty of uncertainties for those following Turkey.
Investors have been “burned too many times by U-turns in Turkish economic policy in recent years to be mollified by the return of an able technocrat from a different era,” said Nick Stadtmiller, head of product at Medley Global Advisors in New York. A sustained rebound in inflows will take “time and more evidence of genuine commitment to orthodox policies,” according to Stadtmiller. “Investors won’t believe it until they see it.”
That said, capital flows from foreigners into Turkish stocks and bonds are set to turn positive in 2023 for the first time in six years, thanks to the favorable sentiment generated so far by Turkey’s latest pivot. Cumulative inflows this year reached $1.1 billion by the start of December, according to central bank data. The last year foreigners were net buyers of Turkish assets was in 2017.
Here are some areas of key themes/concerns that could determine the trajectory of Turkish assets in 2023, based on interviews with 15 money managers, strategists and economists:
Monetary Policy
Under the new economy team, Turkey’s central bank has raised the policy interest rate to 40% from 8.5%, while winding down some of the unconventional measures that deterred foreign investors. However, the rate hikes have not stopped the depreciation of the lira.
“Interest-rate policy already is close to its practical maximum,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG. “The reason for the market’s skepticism seems to be its mistrust in the sustainability of the current monetary policy stance.”
“This can only change if President Erdogan convinces the market that he will not interfere in monetary policy issues,” said Leuchtmann.
If the recent policy normalization from Erkan and Simsek continues, and if the environment remains benign, “there is room for Turkish assets to perform well,” said Paul Greer, a money manager at Fidelity International in London.
Unwinding Restrictions
In addition to tightening monetary policy through rate hikes, the economy team has been unwinding measures and simplifying rules brought in by its predecessors.
“The aim of these measures was to reduce the depreciation pressure on the lira, but they also reduced capital inflows to Turkey,” said Commerzbank’s Leuchtmann. “For foreign investors, any measure that makes it difficult to repatriate capital is an argument against investing in Turkey.”
The new team has scrapped rules forcing banks to buy government bonds as a penalty for lending at interest rates above certain limits or falling short of targets for business loans. Also lira interest rates inside Turkey and abroad have converged after the central bank’s rate hikes and reserve requirement adjustments, creating the possibility for Turkey to ease restrictions on swap transactions that lowered the amount of liras commercial banks were allowed to lend to foreign counterparts.
Local Elections
Municipal elections at the end of March mean it’s probable that Erdogan’s focus may once again shift back to supporting the economy. That’s among key concerns for money managers as it adds uncertainty to their investment decisions, and may keep many at bay until the vote is over.
The elections could “trigger support measures by the government which might undermine the gradually improving perception of Turkish economy policy,” said Sebastian Kahlfeld, a portfolio manager at DWS Investment.
On the other hand, once the elections are over, there will be almost four years without another vote scheduled.
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