Hitch a ride on Turkey's U-turn, but look out for hairpin bends
Optimism surrounds Turkey after a policy shift, but can it last?
Excitement is building in the emerging market bond market about a potential resurgence of Turkish issuance in September. There are good reasons for that, but President Recep Tayyip Erdoğan’s Turkey is still a country where widespread bond access in the longer term is far from certain.
Capital markets issuers from Turkey are looking at market conditions and levels that are better than they have been for some time. The country’s five year credit default swap spread on Tuesday was around 385bp — more than 300bp tighter since mid-May and well off the high of 908bp it hit in July last year.
There are several reasons for the improvement. First, the general election in May removed some uncertainty for investors. Though many international investors had been rooting for the opposition to win, the simple fact of the election having come and gone without mass civil disruption is enough to have lifted sentiment towards the country.
Erdoğan then surprised many by choosing well respected figures to head the finance ministry and central bank, strengthening expectations that he could change course towards monetary and fiscal orthodoxy.
Policy rates have been raised 900bp in two months. Some analysts have viewed these actions as a complete reversal of previous maverick policies, under which annual inflation soared as high as 86% in October last year. In the meantime, US rates have also stabilised, making EM in general a more attractive proposition.
Investors who bought Turkish bonds in May have been richly rewarded. And that is the feeling debt capital markets bankers and Turkish issuers are hoping will carry through to September.
GlobalCapital understands that a clutch of issuers — notably the big and long absent Turkish banks, but also several companies — are waiting to jump in.
Many have had debts mature in the last two years that the market has not been conducive to refinancing with new bonds. Now is their chance.
If they do manage to draw in investors in swathes — as many are now expecting to happen — then the market adage that investors have short memories will be reinforced.
After all, we have been here before — several times in fact. Erdoğan has changed his mind repeatedly about how independent a central bank should really be.
Each time he lurched back towards personal interference, market carnage followed.
Hafize Gaye Erkan, the new governor of the Central Bank of the Republic of Turkey, spoke last week about its new policy. She called it a holistic approach, taking gradual steps with monetary, credit and quantitative tightening to achieve price stability.
Nevertheless, she ducked questions about central bank independence and interest rate hikes. Political pressure seems still in play.
Erdoğan could chuck out the current economic leadership team and swerve back to pro-growth policies at any moment.
And with municipal elections coming up in March 2024. at which Erdoğan is determined to win back control of Istanbul, this should be a worry.
An extended economic downturn, such as might be caused by a serious battle against inflation, could raise the risk of Erdoğan swivelling back towards more populist economics.
High hopes are building for Turkey and its bond market access. This may well be the right entry point for investors.
But they should be mindful that the race they are entering in September is more likely to be an obstacle course than a fun run.