The return of Turkey to investor good graces as it brings back a more orthodox economic path is the perfect time for bond buyers to press the government on another problem — the erosion of the country's democracy.
For years many foreign investors have steered clear of Turkey due to president Recep Tayyip Erdogan’s economic mismanagement. But there has also been a second reason for avoiding Turkey — the steady erosion of it's democracy.
Thousands of political prisoners remain locked up in Turkey’s jails, and Erdogan maintains a high degree of control over the press. While the vote itself in May was clean, it was perhaps only such because Erdogan won without the need to engage in any skulduggery.
Nonetheless, the process showed how deep Erdogan’s press dominance is in Turkey. During April — before the election — he received 60 times more coverage than his opponent on one of the main public news channels in Turkey, according to the non profit organisation Reporters Without Borders.
His election victory in May seemed to confirm the worst — that Turkey would plough on with its path to economic meltdown. But instead Erdogan has changed tack, putting in place investor friendly policymakers and policies. His actions have been somewhat surprising, albeit welcome, for investors, and Turkish bond prices have surged as a result.
Erdogan, in reversing Turkey's economic course, has shown he will listen to the investor community.
We're going through changes
Part of the reason for this economic reversal will be pressure from partners in the Gulf, who are ploughing finance into Turkey. This investment would not come without a high level of confidence that Turkey's economy will get back on track.
Even if Gulf partners, such as the UAE, do not care much about democracy, western investors do — and they are still important to Turkey.
Those investors can and should focus on Turkey's democratic record. They are returning to buying Turkish bonds and they will have more opportunity to do so shortly, with long-absent Turkish banks and corporates plotting a return to the primary bond market.
Investors who already hold Turkish debt are set to buy more of it. And those buyers who have been absent from Turkey completely may start to return. This means the Turkish authorities will be talking to a greater number of investors — increasing potential pressure the latter can exert on the government.
Investors should use this opportunity not only to show how welcome Turkey’s new economic and monetary policy path is, so that the government sticks to it, but also to start urging authorities to improve Turkey’s democratic credentials.
And because Turkey has had to pay very high prices for any new bonds over the past two years — better economic policy will alleviate that.
Investors can offer Turkey the carrot of even lower bond prices, if it improves its democratic credentials. And they can use the stick of the threat of dumping Turkey bonds again, pushing up yields and making borrowing more expensive for the government.
Erdogan may not care either way about democracy, but money talks.
Undemocratic governments are widespread in emerging markets. Indeed, Turkey is a strong democracy when compared with some other major EM sovereigns like Russia or China.
Whether it is concerns over democracy or a country’s climate record, most EM investors say they prefer to engage with a borrower rather than sit on the sidelines and wait for improvement.
And Erdogan’s rapprochement with the foreign investment community since May means there is no better time for investors to press the Turkey’s government on its democratic credentials.
There are local elections in March next year in Turkey, which will prove another test for Turkish democracy. But it is also the next opportunity for Turkey to improve its relationship with investors.
Back in 2019, Erdogan’s AKP party lost the Istanbul mayoral election, and went to great lengths to get the result overturned. It ended up losing by an even greater margin in a re-run of the election.
Ahead of next year’s election, investors have an opportunity to let Erdogan know that a stronger democracy will benefit Turkey in the debt capital markets. He has shown his capacity to listen — so investors should make their voices known loud and clear while they have the opportunity.