Turkey’s CDS Falls to Seven-Year Low as Foreign Interest Surges

Turkey’s financial risk indicators strengthened markedly in late November, with the country’s five-year credit default swap (CDS) dropping to 233 basis points, the lowest level recorded since May 2018. The decline signals improving investor confidence, supported by tighter financial discipline, a shrinking stock of exchange-protected deposits, and persistent improvements in external balances.

Turkey’s CDS Hits Lowest Level Since 2018

The fall in CDS—often treated as a barometer of sovereign risk—reflects a notable shift in market sentiment. At 233 basis points, Turkey is now trading at its strongest risk perception in more than seven years.

This improvement reduces the country’s borrowing costs in global markets, while simultaneously encouraging more foreign interest in Turkish lira-denominated assets.

Analysts highlight that the drop in CDS coincides with a broader recalibration of external risk assessments. As macro indicators stabilize and policy predictability strengthens, global funds have shown renewed appetite for Turkish assets across both fixed-income and money markets.

KKM Balances Continue to Decline

One of the key developments underpinning this renewed confidence is the ongoing decrease in Kur Korumalı Mevduat (KKM) balances.

For the week ending 21 November, KKM deposits fell from TRY 30.3 billion to TRY 22.4 billion, continuing the downward trend that policymakers have prioritized throughout the year.

Investors see the steady unwinding of the KKM mechanism as a step toward normalizing Turkey’s financial architecture and reducing structural sources of FX risk. The decline also complements foreign inflows, helping stabilize currency expectations and reducing sovereign risk premiums.

Current Account Posts Surplus for Third Straight Month

Adding to the positive macro momentum, Turkey recorded a current account surplus of USD 1.112 billion in September, marking the third consecutive month of positive external balances.

The country previously reported surpluses of USD 1.738 billion in July and USD 5.418 billion in August, pointing to consistent improvements in Turkey’s ability to finance its economic activity without external strain.

A sustained current account surplus is widely viewed as a key factor supporting currency stability and strengthening investor sentiment, both of which have fed into the decline in CDS levels.

Central Bank Extends Simplification of Reserve Requirements

The Central Bank of the Republic of Türkiye (TCMB) also introduced significant adjustments to the reserve requirements framework, continuing its broad simplification agenda.

Key changes include:

• The temporary 0% reserve requirement on long-term foreign-currency liabilities sourced from abroad will not be extended.
• Differences between reserve requirement ratios for FX deposits and gold deposits have been eliminated, unifying the structure.
• Reserve requirement ratios on long-term non-deposit foreign-currency liabilities have been reduced, lowering the regulatory burden.
• Financing companies’ domestic liabilities to local banks, which were included in the scope of reserve requirements in 2022, have now been removed from the framework.
• The credit growth limitation rule has been extended for one additional year, signaling the continuation of macroprudential restraint.

These steps aim to streamline the monetary system, enhance clarity for market participants, and support Turkey’s broader macroeconomic transition by limiting credit-driven imbalances.

Rising Reserves and Lower FX Risk Support CDS Drop

According to Dr. İsmet Demirkol, founder of Pariterium Danışmanlık, several factors have contributed to the rapid easing in CDS premiums.

He notes that the increase in TCMB reserves and a pick-up in foreign investor interest have considerably reduced perceived exchange-rate risk.

Additionally, the decline in KKM balances and a noticeable drop in physical gold demand have contributed to improvements in Turkey’s risk profile.

Lower exchange-rate risk translates into more stable expectations for both domestic and foreign investors, helping to compress CDS spreads and improve the pricing of sovereign debt.