13 Juni 2018, 12:54 GMT
Following a 75 basis point (bps) rate rise in April and a 300 bps hike in May, on 7 June the Turkish Central Bank hiked their policy rate by an additional 125 bps from 16.5 per cent to 17.75 per cent. We applaud this move from the Turkish authorities, particularly as it comes with some domestic political cost to the incumbent government just two weeks away from contentious presidential and parliamentary elections.
Inflation in Turkey is now 12.2 per cent and likely to rise towards 14-15 per cent over the coming 2-3 months before moderating towards 12 per cent by year-end. With the policy rate at 17.75 per cent this now takes the forward-looking ex-ante real policy rate in Turkey to well over 5 per cent.
This additional risk premium is very adequate for a country with Turkey’s metrics and is well above the emerging market average and other notable bellwether emerging markets countries with very tight monetary policy such as Russia and Mexico. Turkey still has many challenges and is in need of deep structural reform on several fronts. However, today’s move will go a long way to restoring investor confidence in Turkey’s ability to stay ahead of the curve. Ideally, today’s action should be coupled with a commitment to maintain a tight fiscal policy anchor, although this will remain uncertain until after the election results are known.
Despite today’s move, the exogenous back drop for Turkey and emerging markets as a whole remains challenging given the recent recovery in the US dollar and continued rising US yields. With this in mind, we feel the best value in Turkish sovereign debt is on the external currency side, where in our view, Turkey is mispriced relative to other BB rated emerging market sovereigns. Turkey’s fiscal balance and gross sovereign debt-to-GDP is also moderate compared to many of its peers, while its long standing ability and willingness to repay its external debt remains in place.
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