Just a fortnight ago, all market watchers waited for decisions from major central banks, as well as Turkey. First the CBRT raised rates to 19%, above expectations. Managed by Naci Agbal, the action created a positive boost in the following days. Then, in just 48 hours, Mr Agbal was removed from his post with a decree, replaced with Sahap Kavcioglu, a former MP, and member of the ruling AK Party. Things have changed a bit since then – selloffs, rising risk premiums on bonds, CDS, etc. Where are things heading With a packed calendar of upcoming IPOs, it will be wishful thinking to imagine institutional investors will buy Turkish stocks. Cornerstone investors will not change their decisions for a while, but when they decide that is it, at least for a long time. A closed opportunity for companies that plan raising money with an IPO. Hope, everything will be calmed before a contagion in the emerging markets universe.

REASSESSING THE FAIR VALUE

After the recent selloff, local fixed income is fundamentally cheap. In fact, we are finally at levels which provide a decent risk-premium – after trading rich for most of the last few months. Particularly higher inflation expectations in longer tenors are now well priced in. This said, the dislocation in our models is not as extreme as during the currency shock in August 2018. Another reason why local fixed income looks attractive (aside the light positioning), is the more favorable inflation outlook for the second half (although from elevated levels). It would take another sharp selloff in FX (to levels above 9.5) and/or another significant external food/oil shock, to offset those favorable upcoming inflation dynamics. Despite the attractive valuation and lower bond yields in all our scenarios, it is worth flagging that the excess duration holding returns by year-end are not always positive. In fact, it is negative in all three scenarios for 2Y bonds. The reasons are the high current FX-implied yields. To breakeven on the duration exposure, it requires at least a rally to ~14% in 2Y bonds, to ~17.80% in 5Y and 17.90% in 10Y bonds, by year-end.

– Christian Wietoska, stategist, Deutsche Bank, March 24

CREDIT PRESSURES

Before Agbal’s tenure at the Central Bank, excessively loose monetary policy and aggressive loan growth aligned with presidential policy led the lira to depreciate to record lows, constraining market access for Turkish banks. Monetary policy tightening of 875 basis points since November 2020 strengthened the lira by about 18%. That helped banks gain medium-term and subordinated market access at the beginning of this year, neither of which had been available since the start of the coronavirus pandemic last year. Without Central Bank credibility, market access is likely to again be costlier and limited to short-term syndications. A weakening currency and high inflation will continue to erode the confidence of domestic depositors, prompting already-high deposit dollarization of 54% of total deposits as of February 2021 to increase further.

Moody’s comment, March 22