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Turkey’s return to a more conventional approach to monetary policy is boosting investor confidence, setting the stage for capital inflows and underpinning HSBC Holdings Plc’s bullish stance on the nation’s assets.
Turkey’s ‘Orthodox’ Pivot Makes Lira a Favorite for HSBC Commitment to “rules-based orthodox” policies could lead to a faster and deeper improvement in the nation’s fundamentals in the second half of the year, Murat Ulgen, global head of emerging-markets research at the bank, said in an interview in Hong Kong. Inflation is expected to ease and the current-account deficit to narrow, and discussions around fiscal consolidation are “encouraging,” he said in an interview.
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Raising the benchmark interest rate and “normalizing” monetary policy have been at the center of a policy overhaul. President Recep Tayyip Erdogan appointed a new economic team, led by Finance and Treasury Minister Mehmet Simsek, to execute a u-turn from what a prominent politician called an “irrational” approach based on ultra-low borrowing costs, which led to a spike in inflation that officials are still battling to bring under control.
“Given the fact that over the years investors have reduced their positioning in fixed income and equities, I think there is a huge room for improvement and that’s why it’s one of our favorite markets, on equities, credit and foreign exchange,” Ulgen said. Investors are too bearish and the currency can outperform lira forward contracts over the year, which translates to “real appreciation,” he said.
To be sure, inflows from overseas have remained sparse as foreigners wait to see further progress resulting from the return to policy orthodoxy. Overseas investors have bought just $87 million in Turkish lira debt this year, down from $2 billion last year, according to data compiled by Bloomberg. Total foreign holdings of Turkish government debt in liras are currently about $2.5 billion, markedly down from a peak of more than $70 billion in 2013.
But optimism is brewing. Turkish stocks have given investors dollar returns of 33% in less than a year, with funds like Barings Asset Management looking to boost exposure. Goldman Sachs Group Inc. says disinflation could be achieved in the third quarter with seasonal inflows supporting the current-account balance.
The central bank is due to hold its next rate-setting meeting on Thursday, with some analysts already penciling in another hike. Rate setters surprised the market last month with a 500 basis-point increase in a bid to contain prices and stabilize the lira.
All but two economists surveyed by Bloomberg predict the one-week repo rate will be kept at 50% on Thursday, with the rest seeing an increase. The pause will likely last through the third quarter before rate cuts begin in the final three months of the year, according to Bloomberg Economics.
Officials have previously said they see Turkish headline inflation peaking at around 75% in the coming months. Policymakers are slated to present fresh projections next month. Despite currency losses this year that took the lira to a record low and a leadership change at the central bank, the governor has vowed to do “whatever it takes” to stabilize the economy.
Inflation could come down to 40% this year and halve in the year after, HSBC’s Ulgen said. The bank expects the lira’s declines to be contained, falling toward 34 per dollar this quarter from around 32.54 on Wednesday.
“Turkish policy makers have embarked on rule-based orthodox policy, monetary tightening and unwinding of previous unconventional measures” that should eventually lead to “sizable inflows,” Ulgen said.
Apart from Turkey, Ulgen said he also sees improvement in Egypt, Argentina and Nigeria, where substantial policy adjustments have been needed to correct imbalances in their economies.
This article was generated from an automated news agency feed without modifications to text.
