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Pimco is entering Turkey’s bond market on the hope that President Recep Tayyip Erdogan’s efforts to overhaul the economy will help the country return to its investment-grade rating.
The California-based firm, one of the world’s largest bond fund managers, has been buying Turkish lira-denominated government bonds since the second half of last year, prompted by President Recep Tayyip Erdogan’s sudden economic policy changes after winning the general election in May. ing.
“Interest rates have risen significantly, fiscal policy has tightened, policymakers continue to unwind unsustainable policies, and encourage locals to invest from US dollars to lira. These efforts are paying off. ” said Pramol Dhawan, who heads the firm’s emerging markets team.
The fund has been “very constructive” about its assets in Turkey, he added.
Returning Turkey to investment grade status would be a dramatic shift from before the election, when many economists worried the country was at risk of a balance of payments crisis or being forced to impose capital controls. Such an upgrade could happen “within the next five years, if everything goes according to plan,” Dawan said.
Turkey currently holds a single ‘B’ rating across major institutions, having lost its investment grade designation following the failed coup attempt against Erdoğan in 2016, and ranks five to six notches into junk status. ing.
Moody’s Investors Service last Friday raised its outlook on Turkey to positive, suggesting the country could soon have its B3 rating upgraded. The report cited “signs that inflation dynamics are beginning to change, indicating that monetary policy is regaining credibility and effectiveness.”
Investors and analysts’ positive outlook for Turkish assets has increased as President Erdogan’s new economic team, appointed in June, has rolled back many of the unconventional monetary and fiscal policies that have driven away foreign investors in recent years. ing.
The central bank, led by former Goldman Sachs banker Hafize Gay Ercan, raised its key interest rate to 42.5% from 8.5% last summer to rein in inflation that peaked at an annualized rate of more than 80%. Mr. Ercan’s hike triggered a sharp sell-off in Turkish government bonds, pushing up yields and making them more attractive to foreign fund managers.
Policymakers also took steps to rebuild Turkey’s severely depleted foreign currency war chest and raised taxes to rein in runaway domestic demand. It also eased costly programs to defend the lira, which has fallen almost 40% over the past year to a record low of around 30 Turkish liras against the US dollar.
“Turkey is likely to attract foreign capital again, which will help stabilize the lira, a necessary prerequisite for controlling inflation,” Dawan said.
There are signs that foreign investors, who have almost completely withdrawn from the market in recent years, are returning to the market. Foreign fund managers have bought about $2 billion in lira-denominated Turkish government bonds since the beginning of June, central bank data shows.
Elkann met with investors at a JPMorgan event in New York last week and vowed to keep monetary policy tight as long as necessary to restore price stability. The central bank expects inflation, which has hovered around 65%, to start easing in the second half of this year.
A person who attended last week’s event said that Erkann and Finance Minister Mehmet Šimšek, who appeared virtually, “gave a very credible and reassuring update on the impact of the reforms and future goals.”
Still, many investors remain cautious about Turkey, noting that Erdogan has repeatedly in the past abruptly changed economic policy and fired central bank governors for raising interest rates. There is. Local elections in March are seen as a key test of whether Turkey’s leaders, who have been in power for the past two decades, are willing to stick to their new policies.
“Investors are closely monitoring Turkey’s economic policies due to the recent turnover of central bank governors,” Dawan said. But, he added, “markets are currently optimistic about Turkey’s approach to the adjustment process.”
