Duvar English:  Foreign investors back in Turkish debt markets

Foreign investors are returning to Turkey’s debt markets, encouraged by recent interest rate cuts and signs of decreasing inflation. With the central bank easing rates to 45%, optimism has been growing about Turkey’s potential as a key emerging market player, according to Reuters interviews with investors, wrote Duvar English.

 

Foreign investors are flocking to Turkey’s local debt markets, saying they are impressed by interest rate cuts and easing inflation and are hoping that a regional transformation could further boost their bets on the economy.

Turkey’s central bank cut rates by another 250 basis points on Jan. 23 to 45%, continuing an easing cycle it began just last month after an aggressive drive to end years of soaring prices and a tumbling currency.

 

More than a year and a half after President Recep Tayyip Erdoğan’s re-election and pivot back to more orthodox economic and monetary policies, Turkey is back to being a mainstay of emerging market investors.

“Turkey is one of the bigger success stories, one of the positive dynamics in our space that we like,” said Nick Eisinger, co-head of Emerging Markets with Vanguard.

 

“The reform story and the macro story is very positive and still has runway to go.”

 

Local bonds sucked in $1.24 billion of foreign investor cash in the week to Jan 17, the biggest such inflows in two months, bringing the 2025 tally so far to as high as $1.9 billion, central bank data show. Foreigners hold more than 10% of government debt, levels last seen in 2019.

 

While that is a sharp increase from around 1% in 2022, it is still less than half of the 25% prior to August 2018, when the lira crisis started.

 

Emerging from that crisis has been painful.

 

Turkey for years opted for unorthodox fiscal and monetary policies that fuelled red-hot growth. It claimed the top spot for economic growth among larger emerging markets since the onset of the COVID-19 crisis, according to Oxford Economics.

 

But those exposed to local bonds paid a hefty price: with inflation topping 85% in 2022 and touching 75% last year, and a lira tumbling to a series of record lows, a big chunk of investments were wiped out.

 

Disinflation a major theme

 

The more favorable recent backdrop has also seen Amundi, Europe’s largest asset manager, venture into domestic bonds.

“We like Turkey from a local currency perspective,” said Yerlan Syzdykov, global head of emerging markets & co-head of emerging markets fixed income at Amundi.

Easing inflation – which was lower than expected at 44.38% annually in December – coinciding with a fragile balance of payments situation that gave Turkey little wiggle room to allow the lira to slide further, was favorable to investors for now, said Syzdykov.

“The pace of the disinflation should continue being higher than the pace of devaluation – so that’s the bet that we have as well.”

 

 

 

Reuters poll indicates rapid-fire rate cuts in 2025

Weekly foreign flows to Turkish local bonds have varied sharply in recent months, graphic by Reuters.

A Reuters poll shows the central bank is expected to forge ahead with cuts that leave its key rate at 30% at year-end, when the bank itself expects inflation to slow to about 21%.

 

 

The politics story:  regional peace,   reconstruction  pie

While the government may be less inclined to push for high growth for now, recent regional developments – including the ousting of Syrian leader Bashar al-Assad and the Israel-Hamas ceasefire in Gaza – could add to Turkey’s growth momentum, analysts said.

“Everything that’s happened in the Middle East is probably quite positive for Turkey,” said Magda Branet, head of emerging markets and Asian fixed income with AXA Investment Managers.

“Turkey will probably be an actor in the reconstruction of the region and in the reconstruction of Ukraine… So on the growth outlook and the fiscal outlook there’s definitely some positive news.”

 

Excerpt

 

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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.