A broad base of the investor community is reengaging with Türkiye amid the change in macroeconomic policies, and there has been a tide shift, with notable changes in market sentiment toward the country, noted Stefan Weiler, the head of JP Morgan’s Central & Eastern Europe, Middle East and Africa (CEEMEA) debt capital markets on Wednesday.
Investors, asset managers and analysts have a more constructive outlook for Turkish assets since the new economic team was appointed after the elections last May, with the country shifting to conventional monetary and fiscal policies.
Weiler said there have been significant changes in market sentiment toward Türkiye since the elections last May, as the economic team gave credibility to the change in policies.
“We have seen a significant outperformance of Türkiye’s credit spreads, for the government and as well as for its corporates and banks,” he told Anadolu Agency (AA).
“I would say that there is a lot of good news and optimism that is priced in already in the dollar government curve. Türkiye is rated B but the market is already pricing in and anticipating ratings upgrades as recent strong performance makes it comparable with BB credit,” Weiler noted.
Türkiye holds a single B rating among major agencies, with the outlook turning to positive.
In September, Fitch revised its outlook for Türkiye from negative to stable and affirmed its B rating, while S&P Global revised its Türkiye outlook from stable to positive last month, affirming the country rating at B.
Moody’s revised Türkiye’s outlook to positive from stable, this month affirming its B3 credit rating.
“The main driver of the outlook change to positive is the decisive change in economic policy, in particular the return to orthodox monetary policy, which, if maintained, materially improves the prospect for reducing Türkiye’s major macroeconomic imbalances,” the credit rating agency said in a statement.
“While headline inflation is likely to rise further in the near term, there are signs that inflation dynamics are starting to turn, indicative of monetary policy regaining credibility and effectiveness,” it said.
Weiler said that looking at the fundamentals of Türkiye versus the ratings of the credit rating agencies, “we think there is strong potential for upgrades this year.”
“We would anticipate further upgrades this year at JP Morgan,” he said, saying that it will take some time for the country to return to investment grade.
Tide shift
Citing an investors meeting for the Turkish central bank hosted by JP Morgan in New York this month, Weiler said Treasury and Finance Minister Mehmet Şimşek and Central Bank of Republic of Türkiye (CBRT) Governor Hafize Gaye Erkan explained to over 150 investors the impact of the changes they have made and what other changes to expect.
“So far, the impact has been strong. I think a large part of the investor community is reengaging with Türkiye.”
Reffering to the tide shift, Weiler however said that it “doesn’t mean that all investors are back.” He said there are some investors “thinking that they need to see more time pass and feel comfortable to allocate their resources.”
He also said the CBRT should continue the guidance it gives to the market regarding the fight against inflation, and “this may mean continuing the interest rate increase.”
In June, the central bank began its first monetary tightening cycle in 27 months, delivering an aggressive 650-basis-point hike. Since the middle of last year, the bank has raised its policy rate a total of 3,400 basis points to 42.5% from just 8.5% and is set to announce its latest interest rate decision on Thursday.
Economists participating in an expectations survey conducted by AA estimated that the bank will raise its one-week repo auction interest rate by 250 basis points to 45%.
“I think the market feels that we are probably near the peak, although there is still a hike expected on Thursday,” Weiler said.
Record year of issuance
Recalling how inflation in Türkiye is above 60% and interest rates are at 42.5%, Weiler said there needs to be a positive real rate return for more inflows into the local curve but there has been some progress on that.
“The trajectory seems quite positive. We are forecasting a record year in terms of issuance for Türkiye as a whole including corporates and the government. We are quite optimistic,” he said.
Weiler noted that the previous record of issuances was $20 billion, and it was $17 billion last year.
“As for my own personal view, I would anticipate $25 billion plus of issuance this year,” he said.
Vanguard, the world’s second-largest investment firm with about $8 trillion in assets, recently decided to reengage with local currency government bonds in Türkiye following its shift in macroeconomic policies, Nick Eisinger, Vanguard’s co-head of emerging markets active fixed income, responsible for the firm’s active emerging markets strategy, told AA last week.
U.S. bond giant Pimco also announced it has entered Türkiye’s bond market since the second half of 2023, purchasing lira-denominated debt.