Few would have predicted such an electric start to 2019 for Turkish borrowers back in August 2018, when the lira was nudging TL6.9 to the dollar. Turkish borrowers were very much persona non grata in capital markets.
A bold 625bp rate hike in September brought the Turkish central bank’s monetary policy back into alignment with the international consensus of how to tackle inflation of more than 20%.
That, combined with Turkey’s release of US pastor Andrew Brunson and the subsequent relaxation of diplomatic tensions between the nations, gave the world the impression that Turkey was firmly back on track.
Inflation began to sink and, driven by a growth in exports, the current account moved into surplus. Economic growth vanished and Turkey slipped into recession, but it was all part of the plan and investors were undeterred.
Then the US economy began to falter and the Federal Reserve realised that it might not be able to follow through on its aggressive rate hike trajectory. The dovish tilt from the Fed removed the heaviest anchor from emerging markets, which entered a sharp bull run.
Turkey was perhaps the biggest beneficiary. Its 10 year dollar government bond yields fell around 75bp in January, while its local currency yields fell 200bp. The currency also strengthened steadily in January, touching TL5.18 to the dollar.
Investors were thrilled (as indeed was GlobalCapital). The yields available on Turkish paper are still staggeringly high. Borrowers are pricing deals hundreds of basis points wider than they would have come a year ago.
For most buyers, it was a no-brainer. The fundamental credit quality of most of the borrowers was never really at fault. The sell-off in 2018 was due to Turkish president Recep Tayyip Erdoğan’s unorthodox approach to monetary policy and the hold he appeared to have over his nation’s central bank.
With the monetary policy situation back in order, it was time to get back to business and hoover up vast quantities of Turkish paper at extremely generous yields.
But the cracks are starting to show. Inflation appears to be distressingly stubborn and is only inching downwards at a painfully slow rate. The currency and asset prices topped out in February and began to retrace their gains.
The road to recovery appears to have more bends in it than we had hoped. The currency fell back to November levels on March 22 thanks to a worrying depletion of the Turkish central bank’s foreign currency reserves.
An emergency tightening of monetary policy through the suspension of one week repo, and a commitment to build up reserves appears to have mollified investors and the currency has recovered somewhat. But the absence of FX reserves reared its head again on Thursday, and the currency slumped again.
The old problems are still there. With slow progress on inflation, worried Turks have started switching to foreign currency deposits to avoid holding lira. But new problems are arising. The inability of foreign borrowers to make use of the swap market has meant that liquidity is in short supply in Turkey and banks are stretched more and more thinly. They’re running out of options.
Last week, Turkish borrowers got lucky. The Fed turned even more dovish and Vakifbank was able to sell a bond into an EM rally, but even still the new issue premium looked more generous than those its peers achieved a month or two ago.
And the new issue, battered by the news of the Turkish central bank news, is wide of reoffer.
After a record period of Turkish borrowing, investors’ lines are groaning with paper. Still, there is more to come. The sovereign is rumoured to be eyeing more than its $8bn programme and plenty of banks have debt to refinance.
Let’s hope investors’ appetite for the country can be stretched a little further. Turkish paper appears to be losing its shine.