Wild ride far from over for Turkey’s lira
■ ■ Non-resident net-transactions recorded an outflow in shares and domestic debt securities in the week ending January 4. Assessing deviations from long-term averages for Turkish government bonds, J.P. Morgan found Turkey’s 10-year government bonds to be the most expensive in the world. Deutsche Bank warned this week Turkish debt was on its list of things to avoid.
Real returns on Turkish government debt are deeply negative with 10-year government bonds yielding 15.7 per cent, while inflation stood a touch over 20 per cent.
Turkey saw a rash of rating downgrades from the main agencies last year as its woes escalated. S&P Global, traditionally the most aggressive in its moves, cut it twice in three months as did Moody’s. But Moody’s and Fitch’s score are still S&P’s B+ rating, so there could be some more to come. 20 per cent in lira terms.
Stocks and debt suffered net sales from foreign investors last year, according to Institute of International Finance data.
The last time both asset classes saw outflows was during the 2015 crisis.
Equities haemorrhaged over $1 billion in 2018.
Is the Turkey shock done? “From a macro perspective maybe there’s a little bit more to come,” said Fitch’s chief sovereign analyst James McCormack. “We will be focused on the public finance implications.”
Derivatives markets used by traders to bet on or hedge against currency swings point to a calmer time for the lira this year, albeit not completely calm.
Implied volatility options covering all the way from next week to next year are at less than half the level they were back in August at the height of the lira meltdown. They are, however, still double where they were this time last year when emerging markets were still on the surge globally.
Turkey’s central bank held its main rate at 24 per cent yesterday. However, with inflation falling fast, a long record of surprising markets and a president advocating low rates, experienced Turkey watchers fear it could cut soon. ■