Foreign investors are set to resume buying Turkish bonds, following a 10-month exodus, after elections consolidated Prime Minister Recep Tayyip Erdogan’s political base.
Overseas ownership of Turkish debt may be poised to rise from a 20-month low on speculation that political stability will return following the March 30 poll, said Ercan Erguzel, an economist at Denizbank AS. Local-currency bonds jumped after the result, with two-year notes capping the longest rally since May, and the lira erased this year’s drop. Foreigners boosted their holdings by a net $154 million from March 14 to March 28, the biggest two-week gain since Jan. 10, central bank data show.
“Some foreigners may start to show interest in bonds again,” Istanbul-based Erguzel said by email on April 2. “Prices in Turkey and other emerging markets have become cheap. Just as outflows were gradual, inflows will be gradual as well.”
Erdogan’s Justice and Development Party, or AKP, won 44 percent of the vote in local elections, affirming his popularity even after accusations of graft against the government sent the lira to a record low in January. Assets have also been boosted as Russian President Vladimir Putin pledged to pull troops back from Ukraine while Federal Reserve Chair Janet Yellen said this week’s stimulus would be needed for “some time.”
Foreigners cut their share of the nation’s domestic debt for the 10th consecutive month in February to 20.7 percent, the least since July 2012, according to the Treasury. They reduced their holdings by a net $2.8 billion this year, central bank data show.
International capital flight accelerated after a corruption investigation targeting Erdogan’s government came to light on Dec. 17. The prime minister responded with a purge of the police force and judiciary, reassigning hundreds of police officers and prosecutors. He blocked YouTube and Twitter last month after they were used to disseminate recordings purportedly showing him and his inner circle discussing graft and embezzlement. Erdogan has said the recordings are doctored montages.
The lira plunged to a record 2.39 per dollar on Jan. 27 while yields on 10-year bonds surged to an all-time high 11.36 percent March 24.
The currency has strengthened 3.7 percent following the election, taking its gain to 6.6 percent since the central bank more than doubled its benchmark interest rate on Jan. 29. It traded up 0.9 percent at 2.1129 per dollar at 5:05 p.m. in Istanbul. Ten-year yields tumbled 24 basis points on March 31 and are 22 basis points lower this week at 10.28 percent.
“We were also underweight, but got neutral just before elections and lucky we did,” Helena Clijsters, who helps oversee about $700 million in emerging-market debt at Dexia Asset Management in Brussels, said Thursday. “The rally we see now will not go on for long, as a new political equilibrium may not be achieved.”
Growth will slow to 2.3 percent this year from 3.9 percent in 2013, according to the median forecasts in Bloomberg surveys of economists. Even so, the central bank may be forced to increase interest rates again after a report Thursday showed inflation accelerated to 8.4 percent in March from 7.9 percent the previous month.