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Fixed Income
Robert Burgess
Incumbent Recep Tayyip Erdogan has won the second round of Turkey’s presidential elections and will continue his two-decade rule.
With more of the same unorthodox economic policies expected, and associated risks for inflation and the exchange rate, CG continues to see a challenging outlook for the country’s hard and local currency sovereign bonds.
Turkish spreads look relatively tight
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Data as at 30 May 2023. GD: global diversified. Source: Bloomberg
According to fixed income portfolio manager Robert Burgess, while growing market pressures could force the central bank (CBRT) to consider raising rates to help avoid financial stability risks, it would be unlikely to mark a sustained return to conventional policy. More likely would be a continuation of ultra-loose monetary policy, administrative measures to ensure cheap financing for the government and keep a lid on dollarisation, continued use of the public sector balance sheet to absorb exchange rate risk from the private sector, and external borrowing to support the balance of payments.
While this policy mix has supported consumption-led growth, it has also resulted in twin deficits (fiscal and current account), currency weakness, a decline in foreign reserves to dangerously low levels, and persistently high inflation (averaging over 30% annually over the past five years).
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