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

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.

26 avril 2023
Bowers Gordon
Gordon Bowers
Research Analyst, Emerging Markets Fixed Income
Share article
Share on linkedin
Share on email
Sujets clés
Sujets connexes
Listen on Stitcher badge
Share article
Share on linkedin
Share on email
Sujets clés
Sujets connexes

PDF

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.

Important information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

Eclairages connexes

18 juin 2024

In Credit Weekly Snapshot – June 2024

Our fixed income team provide their weekly snapshot of market events.
Read time - 5 min
14 mai 2024

In Credit Weekly Snapshot – May 2024

Our fixed income team provide their weekly snapshot of market events.
Read time - 5 min
23 avril 2024

In Credit Weekly Snapshot – April 2024

Our fixed income team provide their weekly snapshot of market events.
Read time - 5 min
21 juin 2024

Emma Gullifer

Assistant Fund Manager

Green to gold: realising opportunities from the carbon transition

We explore the interventions required to monetise green energy, and how investors might benefit from the carbon transition.
Read time - 2 min
20 juin 2024

What do geopolitical risks mean for central bank FX reserves managers?

Two major industry surveys show that adjusting for geopolitical challenges will impact the way foreign exchange reserves are managed
Read time - 8 min
19 juin 2024

Sally Springer

Senior Thematic Research Analyst, Global Research

Human capital – supply: the impact of demographic transition on investments

Working populations are in decline, with the demographic dividend that has supported economic growth in many developed markets under threat. This will have a direct impact on the firms in which we invest.
Read time - 8 min
true
true

Important information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

Vous pourriez aussi aimer

Approche d’investissement

Le travail d’équipe est fondamental à notre processus d’investissement qui est structuré de manière à évaluer et mettre en pratique de solides idées d’investissement pour nos portefeuilles.

Fonds et VL

Columbia Threadneedle Investments dispose d’une gamme complète de fonds d’investissement répondant à un large éventail d’objectifs.

Approche d’investissement

Le travail d’équipe est fondamental à notre processus d’investissement qui est structuré de manière à évaluer et mettre en pratique de solides idées d’investissement pour nos portefeuilles.

Veuillez confirmer quelques détails vous concernant pour visiter votre centre de préférences

*Champs obligatoire

Une erreur s'est produite veuillez réessayer

Merci. Vous pouvez maintenant visiter votre centre de préférences pour choisir les informations que vous souhaitez recevoir par e-mail.

Pour afficher et contrôler les informations que vous recevez de notre part par e-mail, veuillez visiter votre centre de préférences.