EM inflows accelerate in June, Turkey still outlier

The latest data published by the Institute of International Finance (IIF) showed Wednesday, portfolio inflows into Emerging Markets increased nine fold last month, with Emerging Asia leading the pack, reported FXStreet.

Key quotes (via Reuters)

“Portfolio inflows jumped to $32.1 billion in June from $3.5 billion in May, the bulk of it in debt securities.

“Debt flows accounted for $23.5 billion of total.”

“Chinese equities attracted some $6.1 billion.”

“Equities outside of China reversed an outflow trend to see net inflows of $3.4 billion.”

“Emerging Asia was the region that attracted the most flows last month with $17.1 billion.”

“Latin America, with $7.3 billion, came second.”

Reuters:  EM debt issuance to continue

A flourishing first half for emerging market debt issuance is expected to continue, with worries among some investors about a risk of oversupply eased by Ukraine’s cancellation of a $1.75 billion Eurobond.

Higher-yield emerging market borrowers like Ukraine have been tempted back to the market by growing risk appetite after a glut of investment grade issues by Gulf governments and Israel in the immediate wake of the coronavirus crisis and oil price rout.

Ukraine’s plan was promptly aborted at the request of investors, sources said, after central bank governor Yakiv Smoliy unexpectedly resigned, in a reminder of the risks inherent in some emerging markets.

But Ukraine’s last-minute change is unlikely to deter appetite for other higher-yield issuers.

“For some borrowers, financing levels are now more attractive than pre-crisis. Our pipeline is similar to what we saw in June, so we do not anticipate a slowdown in July,” said Stefan Weiler, head of Central and Eastern Europe, Middle East and Africa debt capital markets at JPMorgan.

Weiler said a mix of corporates, financial institutions and governments from most regions were preparing to access markets this month, with funding costs starting to become comparable to pre-crisis levels on a yield basis.

Belarus, Albania and Dubai-based ports operator DP World were among recent issuers, capping off a record first half, during which $110.5 billion was sold by sovereign issuers and $274.8 billion by corporates, Refinitiv data shows.

Although some borrowers, such as Saudi Arabia and Russian issuers, have even been able to achieve record low yields, some investors are worried about the risk of oversupply.

The latest bonds from Albania and Belarus have traded sideways since launch, while Egypt’s recent issue has not performed particularly well, Nick Eisinger, principal, fixed income emerging markets at Vanguard, said.

“The market is still concerned about the fundamentals and the outlook for some of the riskier names … if there’s too much supply and that’s not with a decent enough concession the market struggles a bit,” Eisinger said.

Turkey still the outlier

According to data collected by Central Bank of Turkey, foreign financial investors sold a net $158 mn of equities and TL-denominated bonds in the week ending 25 June. Thus, in the last 12 months Turkey lost $12  bn in hot money, which is a record in post-2008 period.

 Additionally, Turkish  Treasury failed to issue any Eurobonds in the second quarter of 2020, as Turkey’s 5-year CDS premiums hovered around 450-550 basis points, far higher than peers such as Brazil, Russia and South Africa.

Turkey’s inability to attract foreign capital is major obstacle to a robust economic recovery, because the country has a chronic savings shortage. 

Experts and fund managers blame the problem on Erdogan administration’s erratic policy and regulatory decisions, which has magnified uncertainties created by the ongoing Covid-19 outbreak, excessive asset purchased by Central Bank and a widening budget gap, expected to exceed 6% of GDP in 2020.

Ankara has shuttered the swap market, is leaning on commercial banks to increase loans at a time when macro-credit risk is unusually high. It has also increased ad-hoc interventions in the real economy, raising import taxes at will and   pressuring supermarket chains to halt price increases to control inflation.  Finally, TL is no longer a free floating currency, with   state banks intervening regularly on the sell side.  This creates huge problems for foreign investors which may still wish to take advantage of cheap valuations, because a de facto fixed currency system is prone to rapid devaluations.

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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.