Is the worst over for the Turkish lira exchange rate? By

22 – By some metrics, Turkey looks very much like the worst troubled country in Latin America. But some investors – including Fidelity International Ltd. And Vanguard Asset Management Ltd. They find what they like in Turkey.

Since President Recep Tayyip Erdogan fired the market-friendly central bank governor last month, the cost of insuring Turkey’s sovereign debt has risen to the highest level in emerging markets after Argentina. The lira weakened and a measure of the probability of a year-long default jumped to a record level amid concerns about central bank reserves, foreign borrowing needs and an increase in cases of coronavirus that threatens tourism revenues.

The new conservative, Shihab Kafcioglu, sought to calm investors ahead of his first interest rate meeting on Thursday, saying it should not be assumed that a reversal of the gains of his predecessor should be.

Magic returns

For the bulls, the sale has gone too far, and both Fidelity Investments and Vanguard Group have increased their exposure to Turkish debt in hard currency, thus increasing their burdens. Unlike Argentina and Lebanon which defaulted in 2020, Turkey has sufficient cash reserves, while the payment default for swaps and swaps is a technical problem, they claim.

“We believe that a Turkish default is unlikely in the near term,” said Paul Greer, money manager at Fidelity Investments in London. Turkey relies heavily on foreign capital to finance its natural current account deficit and the external financing requirements of its companies and financial sectors. To this end, we expect Turkey to continue to demonstrate its willingness and ability to service its foreign and domestic debt obligations. “

Investors are gravitating towards the foreign bond market after Nagy Aghbal’s surprise expulsion on March 20 hit the local currency and left local debt investors with losses. The Bloomberg Barclays Index (LON 🙂 shows that gains in Turkish dollar bonds have tripled the emerging market average this month. The additional return that Turkey is paying on government debt in dollars compared to the United States fell one basis point on Tuesday to 505 basis points, a premium higher than that of Nigeria and Egypt.

(SE 🙂 Turkey offers “attractive entry points for superior opportunities”, said Jarir.

interest rate

The lira has fallen more than 8% against the dollar this year, the worst performance after the Brazilian real and the Argentine peso. But there are signs that they are now past the worst. The currency gained 0.2% on Wednesday and was restricted by this week’s range, while credit default swaps have eroded some of their gains since late March.

The swaps increase is more due to its use as a hedge by investors trapped in debt-strapped positions than a true bet on default, according to Nick Eisinger, co-chair of active fixed income in emerging markets in Vanguard, London.

Compared to troubled governments, Turkey’s debt burden is relatively low at 37% of GDP. The equivalent levels in Lebanon and Argentina are 172% and 97%, respectively.

“The Turkish financial sector is an integral part of global financial engineering,” said Sergey Dergachev, emerging market debt portfolio manager at Union Investment in Frankfurt. These close relationships with European and Gulf lenders mean that any default on debt will be a major blow to the lenders’ reputations.

“This is a big difference against Argentina,” said Dergachev.

Akbank TAS, which sets the benchmark for other Turkish banks, borrowed about $ 677 million in a two-tier joint offering last week at a cost comparable to a facility in October.

Reserves risk

At the same time, investors are paying close attention to Turkey’s foreign exchange reserves. Before Iqbal’s arrival at the central bank in November, the former Treasury and Finance Minister was attacked by burning stocks in an attempt to stem the lira’s losses. Erdogan said he had not lost any reserves.

Turkey spent 128 billion US dollars to stop the collapse of the exchange rate ahead of Naji Iqbal.

One potential risk is the central bank’s practice of borrowing tens of billions of dollars from lenders via swaps. As banks acquire $ 221 billion in hard currency deposits, a weak lira could prompt Turks to withdraw their savings from lenders, forcing the central bank to close swap positions.

“They are on a bumpy road that requires high attention, which is why the market is obsessed with their need to manage tight monetary policy,” said Manik Narain, head of cross-asset strategy in emerging markets at UBS AG.

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