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Unnerved investors

Turkish Central Bank monetary policy remains very tight given the forecasted level of inflation, and the wide current account deficit witnessed during the first half of 2018 has narrowed meaningfully over the last six to nine months largely due to the economic slowdown and import contraction.

However, the market would like more clarity on the recent outsized, and seemingly inexplicable, swings in the country’s low net forex reserves that have unnerved many market watchers over the past few days.

Investors will also be eager to see a commitment from Turkey to maintain a stable fiscal trajectory and a tight monetary policy. The market would also like a commitment from the authorities that they will not covertly intervene to protect the value of the lira via state banks.

Over the past week, the mechanics of local institutions reducing lira liquidity provision to offshore investors has heightened anxiety amongst international investors of soft capital controls and this does not appear to be a sustainable solution to the Turkish lira’s current woes.

Stark reminder

So far, the rhetoric from the Turkish authorities following the local elections has suggested a continued focus on reform and free markets. However, the wild volatility in the Turkish lira over the past few days has been a stark reminder of Turkey’s vulnerabilities as well as the troubling experience for Turkish investors during 2018.

At this point, we see much better value in Turkish external debt compared to the lira. The market is pricing in two to three notches of Turkey’s credit rating downgrade, which we believe is too much. Turkey’s 10-year USD paper is trading at comparable levels to Ghana, despite being a significantly stronger creditor in our opinion.

Paul Greer

Paul Greer

Portfolio Manager