Turkey’s test – voting for an inflection point?
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Turkey’s test – voting for an inflection point?

The opposition finally has a chance to unseat President Erdogan. If they do, we expect a flood of foreign investor interest and see Turkish credit as an effective way of tapping into a country with all the ingredients for success. Read the key takeaways from our recent trip to Turkey.

The emerging market (EM) asset class is in desperate need of a good story. An opposition victory in the May 14th election could be the launching point for Turkey to become the next credit market ‘darling.’ With a strong export base, innovative and resilient private sector, attractive tourism industry, and geographical advantages, Turkey has all the ingredients for success. But twenty years of Presdient Erdogan’s increasingly autocratic rule have left the economy in a tenuous position. Unorthodox monetary policy with deeply negative real rates has caused building internal and external imbalances in the form of elevated inflation and an unsustainable current account deficit. Without a change in policy Turkey risks a balance of payments crisis. Foreign inflows are already dwindling, and current monetary settings risk a run on the domestic banking system. While Turkey’s financial linkages to the rest of the world have declined since 2018, it remains a big enough player that a crisis in Turkey could have spillovers to the rest of the EM universe. 

Near-term, credit metrics are set to deteriorate further into the vote as President Erdogan pursues an aggressive stimulus program to boost growth and win the election. However, given ample fiscal space to accommodate a post-election adjustment, investors are willing to look though near-term headwinds in the promise of a more sustainable long-term growth story should regime change occur. The opposition Nation Alliance is a coalition of six disparate parties with varying interests, but they remain united in their stance on Turkey’s need for an independent central bank and orthodox monetary policy. While an opposition government will pursue a broader reform agenda, we believe a restored monetary pillar is sufficient to attract more reliable sources of foreign funding and allow the private sector to flourish.

Despite the devastation of February’s earthquake in Eastern Turkey, we returned from Istanbul with an overwhelming sense of excitement and optimism from our local interlocutors. For the first time in decades the opposition has a real chance to unseat Erdogan, due to both economic mismanagement and a poor handling of the earthquake response. We see Turkish credit as the cleanest way to pre-position for a positive election outcome given the over-valuation of domestic fixed-income assets and a highly volatile path for the Lira immediately after the election. Investors are broadly short Turkish assets, so we see potential for spreads to overshoot fair value on heavy short covering flows if Turks vote Erdogan out. A disputed election outcome is a risk and the view in the West is that Erdogan cannot afford to lose the election. On the other hand, locals believe Erdogan cannot afford to steal it. For the sake of the EM asset class, let’s hope Turkey’s institutions pass their test and the locals are correct.

9 May 2023
Bowers Gordon
Gordon Bowers
Research Analyst, Emerging Markets Fixed Income
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Turkey’s test – voting for an inflection point?

1 Barron’s. Emerging Market Debt Is Hot. Further Gains Could Be Harder to Find. Craig Mellow, 28 January 2023

2 Financial Times, Investors pour money into emerging markets at near-record rate. Jonathan Wheatley, 26 January 2023.

3 Bloomberg, JPMorgan, as of 30 January 2023.

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Important information

For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients).

This material is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk.  Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This material and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414.  TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This material should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act.  TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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