In the latest IMF’s Article IV review for Turkey the stressed over the current low levels of the gross reserves, which increases the country’s vulnerabilities to external shocks.

Turkey only complies with the three-month imports coverage rule, falling short on all other traditional metrics for reserve adequacy.

Reserves amount to only 60.8% of the short-term debt stock and 39.8% of its external financing needs.

Likewise, reserves as a percentage of the IMF’s ARA metric stand at 74.7%, close to 2018 levels, when the country went through a currency crisis.

With inflation on the rise after the controversial dismissal of yet another central bank high-level policymaker, the lira is coming closer to the 9 USD/TRY threshold.

We believe an interest rate cut might be on the way, as the central bank goes back to its old ways of implementing Erdoğan’s unorthodox monetary policies.

In the meanwhile, discontent among locals is surging. The latest Metropoll survey revealed that Erdoğan’s approval rate decreased from 55.8% to 44.5% in the last year.

Metropoll also studied several presidential elections scenarios with Erdoğan losing in every matchup, except when he faces t...

Turkey reached a record number of cases two weeks ago, with the 7-day rolling average of new daily COVID infections reaching a high of 60,147.

A 17-day nationwide lockdown is already succeeding in bringing down the number of infections, which have fallen this week.

The Health Ministry expects to vaccinate all over 20s by July, which seems unrealistic considering the slow advance so far.

Our estimates suggest that GDP would register a 5.7% expansion in 2021, although we acknowledge that uncertainty around the forecast has increased.

HOLD: Controlling the new wave of contagions could limit the downside for bonds,...

After an interest rate hike of 200 bps, the central bank’s governor, Naci Ağbal, was dismissed by president Erdoğan.

The lira depreciated by 13.3% in the last two weeks of March, as the perception is that economic heterodoxy is back in the game.

Şahap Kavcioğlu, the new central bank governor, tried to calm the nerves by declaring that tight monetary policy will continue as he is not planning to cut the interest rate.

Nevertheless, we think that pressure on the exchange rate will remain as market sentiment deteriorates. 

Despite recent events, we maintain our HOLD position at the short end of the curve...

In 2020 travel income amounted to USD 7.8 bn from USD 25.4 bn in 2019, a fall of almost 70%.

Foreign visitors went from over 44 million people in 2019 to barely 12 million last year.

Energy import bill decreased by 30%, from USD 41.7 bn to USD 28.9 bn, while gold imports grew by 123% in 2020, up to USD 25.1 bn.

The current account went from a surplus of USD 6.7 bn (0.9% of the GDP) in 2019 to a deficit of USD 36.7 bn (5.1% of the GDP) in 2020.

Last week, the Turkish lira was trading at 6.9 per dollar, its best since August.

It has appreciated by 6.8% YTD, ranking as one of the best performing EM currencies.

We expect that authorities will keep the interest rate unchanged until April, when inflation is expected to peak and authorities would proceed with an interest rate hike.

Another encouraging fact is that credit growth has been below inflation in the last two months, and the central bank has been slowly rebuilding FX reserves.

We believe that recent developments do represent a significant change and justify the market’s renewed bullish stance on Turkey’s macro environment

We expect officials to maintain this hawkish stance and to continue raising rates should inflation continue to rise.

Real rates will prove to be key in Turkey in 2021, as they will anchor devaluation expectations and will reinforce the Turkish virtuous cycle

Rising gross FX reserves combined with decreasing levels of FX deposits in the banking system, is what we look at in order to track the dollarization trend within in the financial system.

Even though the ...

Early elections are almost completely ruled out, given the constant refusal of President Erdoğan who suffers a decline in popularity.

For 2021, we estimate that the fiscal deficit will decrease from 4.0% of GDP to 3.1%. Gross financing needs remain large, with 23.7%.

Naci Agbal, governor of the central bank, insisted that he will keep monetary policy tight until 2023 when inflation should be on target.

Official estimates suggest that inflation will decrease to 9.4%. However, we think that there is no reason to believe that there will be a disinflationary process, so we calculate that inflation will close at 16.4%.

...

Since Naci Ağbal was named as governor of the central bank, there has been a policy switch as the interest rate was raised by 675 bps in the last two months of the year.

However, 2020 closes with a y-o-y depreciation of 20% in its currency and annual inflation of 14.6%, above central bank estimates of 12.1% and almost triple its 5% target.

Expectation management is the real struggle for authorities, given that Turks’ perception of future inflation has deteriorated despite the hikes in the interest rate.

Currently, the weighted average cost of CBRT funding equals the interest rate at 17%.

We believe that it is...

President Erdoğan is trying to contain the devaluation of the lira while stemming the decline in reserves while the country also faces growing external tensions.

Only relations with Iran and Azerbaijan are warm.

With Greece, Cyprus, France, Egypt, Israel, Saudi Arabia and at times even Russia viewing Turkey as a competitor if not an outright enemy.

If the new US administration effectively decides to play an active role, Erdoğan would be forced to define the Turkish position over its attempt to keep all its options open.

Although we see these cabinet changes as a first positive sign of reform, our rating remains on...

We take a comprehensive look at political risk indicators in a group of Emerging Market countries, trying to identify potential sources of conflict.

We analyze the electoral scenarios in the four Latin American nations that will have electoral processes during the end of 2020 and all of 2021.

We review the scenarios in the parliamentarians of Argentina and El Salvador, we comment on the electoral process that will take place in Venezuela, and we review the perspectives of the presidential elections in Ecuador.

We evaluated the World Bank’s governance indicators for our sample countries in 2019 and share our view of thes...

October was the worst month for the Turkish currency in 2020, the lira, as it reported a depreciation of 7.5%.

The currency’s depreciation accelerated after the Monetary Policy Committee (MPC) decided to keep the interest rate unchanged at 10.25% on October 22.

According to our estimates, the real interest rate is around -1.8%.  On the other hand, the Central Bank cost of funding stood at 13.4% in October.

Although the central bank is sending mixed signals, we think that they will proceed with a new increase in the interest rate.

SELL: We expect that the current dynamic to continue and the country’s...

In a surprise move, the Turkish Monetary Policy Committee decided to increase the policy rate in 200 bps, from 8.25% to 10.25%.

Given the high inflation and the depreciation of the lira, a hike in interest rates or introducing capital controls were the only two ways to proceed.

With this new move, the real interest rate will be close to 0%-1%.

Yesterday, the average cost of funding from the CBRT stood at 10.69%, with the official policy rate now acknowledging this reality.

We will keep an eye on the market’s and Erdogan’s reactions, but generally believe this is a step in the right direction.

In 2019, energy imports amounted to USD 41 bn, 5.4% of GDP.

The current account would have shown a surplus in 2019 of 4.7% of GDP, excluding the energy balance. 

Natural gas was the source of 19% of the electricity generated in 2019, down from 48% in 2014.

The Turkish natural gas finding in the Black Sea is 37% of the Zohr field, which is one of the biggest natural gas find in the Eastern Mediterranean.

Big savings in the energy bill are unlikely in the short and mid-term.

We maintain our SELL rating as we see that bonds do not fully adhere to Turkey's worsening macroeconomic and financial situation.<...

The lira’s depreciation, followed by the Central Bank’s massive FX intervention, has brought back memories of the financial crisis that Turkey experienced in 2001.

This event casted a long shadow on the country, and its ripples could still be felt during the 2018 currency crisis.

The causes that originated the crisis between the three episodes are completely different, but there is the basic assumption from the first generation model: a worsening in economic fundamentals.

2001 crisis ended in an IMF-supported program. In 2018, Qatar came to the rescue with USD 15 bn in investments.

In this case, we only ...

In the first two days of this week, the lira fell by 5.3% and has been trading above 7.2 TRY/USD, breaking the psychological threshold of 7 that authorities were trying to avoid.

With the campaign to defend the lira intensifying, the free fall in the net reserves has continued, with reserves reaching USD -24.3 bn in June.

Net short position on USD/TRY forwards held by the Turkish Central Bank, has grown from USD 19 bn in January to USD 54 bn in June.

Eventually, the market will force an adjustment, one way or the other, and the longer it takes for Turkey to realize this and actually act on it, the harder the adjustment wi...

After cutting 1,575 basis points of the interest rate, the Central Bank has kept the monetary policy rate unchanged at 8.25% for two consecutive months.

Inflation has been gaining speed, the awkward truth is that keeping the reference interest rate unchanged will not be enough to lower inflation.

Currently, the lira is stable after a decrease of 37% in FX reserves compared to early January.

There is an increase in implied yields on the USD/TRY forward contracts that we understand as a powerful indicator of how the market is demanding hedges against Lira exposure.

Cherry on top there is a credit boom to keep dem...

2019 was a particularly good year in touristic terms revenues amounted up to USD 34.5 bn with 51 million of arrivals.

In March Turkey received 718 thousand people, generating USD 514 mn in revenues, a 51% fall compared to March 2019.

In April, central bank data showed no tourism revenues, for the first time in Turkey’s history

The current account deficit for the period January-April was USD 12.8 bn. For the same period in 2019, it was just USD 885 mn, a y-o-y increase of 1,353%.

Turkish gross external financing needs are up to USD 148.6 bn, equivalent to 20.3% of GDP.

Considering we don’t expect fu...

President Erdoğan’s opposition to working with the multilateral is well-known, as he’s accused the Fund of being “the biggest usurer around the world”.

However, under the current circumstances, an agreement with the multilateral looks tempting: for the rest of the year, the country has pending debt service of up to USD 53.1 bn.

Our estimations suggest that the fiscal deficit will stand at 7.4% of GDP, while the primary deficit will amount to 4.7% of GDP.

The gross financing needs are up to USD 84.0 bn, equivalent to 12.43% of GDP.

It looks like Turkey could avoid the IMF assistance through f...

May was one of those months that feels like a year. We had a default in Argentina, a tense election in Suriname, a deadly pandemic still spreading around the world, and yet, it was a good month for emerging market debt

Our EMFI Core Index went up for the first time in 6 months. The biggest winners were Argentina, Angola and Ecuador, while Venezuela, Suriname and Sri Lanka were among the negative outliers that went against the general risk-on mood

The macro and fiscal situations deteriorated further for all countries covered, and we chronicled the dramatic economic crash in our Country Reports

We’ve been preparing fo...

As of May 22, 8 countries have at least one USD-denominated sovereign bond trading below 50 cents on the dollar.

The Covid-19 crisis could lead to a new wave of sovereign defaults from prolonged confinements.

We discuss the worst debt restructuring events so far this century.

Argentina 2005 remains at the forefront of these events if we exclude the exceptional cases of countries at war or leaving them.

The countries with the most compromised solvencies that could generate problems with their debt are Angola and somewhat behind, Sri Lanka, El Salvador, Egypt and Pakistan.

A pandemic year was on the cards, the dramatic magnitude of its effects was not.

The global economy is expected to shrink by 3% in 2020, but leading indicators are pointing to a deeper downturn.

Emerging countries with a history of volatile economic growth will show the worst results.

Some economies may experience a period of above-trend growth during the recovery, although the level of GDP will remain, in most cases, below the pre-virus level.

Pakistan is the weakest among the EMFI Countries, in terms of the spread of the virus. Lebanon, Sri Lanka and Barbados are the strongest, with a controlled increase rate and a persistent lockdown.

The countries that we evaluate with the worst economic performance year-to-date are Angola, Venezuela, Lebanon, Barbados, El Salvador, Ecuador, Sri Lanka, Argentina and Suriname.

Since the end of 2019, the local currency has depreciated -70.5% in Venezuela, -52.4% in Lebanon, -43.5% in Argentina and -40% in Suriname.

El Salvador and Argentina launched the most ambitious fiscal program among our sample, which will cost 6% and 5.6...

The safest rung of EM hard-currency sovereign bonds fell on March but has already retraced all their losses.

Mid-quality EMs plunged over March and have risen somehow since, but haven’t fully recovered.

This segment has seen a 320 bps rise in average yield in 2020, going from an average 6.1% yield to 9.3%.

We believe high-yield bonds in our mid-quality group have significant upside if they avert a credit event.

After a dry March, markets are again open for fresh bonds, but only from relatively high-quality issuers.

US stocks rose 12.7% in April, while US investment grade bonds rose 4.6% and EM bonds 4.0%.

Our EMFI Core Index fell 0.9% over the month and is 27.1% down YTD.

The best performers of April were Egypt (+4.7%), Sri Lanka (+4.0%) and Turkey (+3.8%).

The worst performers were Suriname (-26.9%), Lebanon (-14.0%) and El Salvador (-11.3%).

The IMF has approved just over USD 16.0 bn for 61 countries.

Of the 16 countries we follow, 6 have already been granted financing for a combined USD 3.5 bn.

Lebanon and Argentina presented restructuring proposals asking for large debt relief but not offering much adjustment.<...

Turkey faces a combination of high external debt, an inability so far to secure a foreign funding source and the rising costs caused by a semi-halted economy.

Additionally, the pace of the Central Bank’s reserve burn has accelerated in response to the Turkish lira weakness, in an environment with a high aversion to risk.

The last time gross reserves reported a slight rise was in the last week of February. It’s been a constant decline since then, and over the last 6 weeks they’ve decreased 30.3%, with reserves currently amounting to USD 53.9 bn.

According to central bank data, state banks have sold nearly...

On April 15, the G20 agreed on a standstill for bilateral debt service during 2020. Nonetheless, the agreement only applies to IDA-eligible countries. The suspension will be NPV-neutral and will involve repayment over 4 years, including a 1-year grace period.

Multilaterals haven’t found a way to implement a similar standstill. In fact, Fitch Ratings warned them that joining in on the G20 standstill could result in rating downgrades if not appropriately compensated by shareholder countries.

On aggregate, official creditors account for almost 90% of the debt of low-income, and 60% of that of lower middle-income countries, b...

The Covid-19 crisis is prompting experimentation with quantitative easing in emerging markets. A group of Eastern European countries has already announced their intention to implement or expand local asset purchase programs.

A second group of QE candidates is in South America, where Colombia and Chile have already implemented asset-purchase programs. Brazil is in the process of discussing a constitutional amendment that would allow its central bank to join in.

Broadly speaking, the general trend in Eastern Europe has been of central banks not establishing formal limits to their QE programs, while the trend in South America has ...

Since the first coronavirus infected was recorded, the Turkish lira has depreciated over 10% while the coronavirus cases keep climbing up as Turkey establishes itself as a new Covid-19 hotspot.

Currently, there are 65,111 confirmed infected and 1,403 deaths, according to the Turkish Ministry of Health.

However, the most worrying fact is that, since April 7th, every day there’s been at least 4,000 new cases.

President Recep Tayyip Erdoğan reluctant to the idea of a national lockdown.

The approach taken by the Erdoğan administration has kept investors worried. The country restricted foreigners’ ability t...

Two weeks ago, we singled out some early calls for a generalized global debt moratorium in our Global Strategy Viewpoint: Force Majeure. The idea has gained significant traction and is becoming one of the main themes in economic and financial discussion.

While we don’t think a generalized moratorium on commercial bonded debt is likely to succeed, investors should be aware that it is a growing theme and bondholders will probably be under increased pressure to accept attempts at restructuring bond terms.

There are some indications that China is a significant roadblock for the IMF-World Bank initiative for a bilateral debt m...

The COVID-19 crisis is raising a difficult question of public policy for emerging market economies with low fiscal space, which have to reconcile economic and social policy with debt service.

The relation between liquidity and solvency problems is not straight-forward: the COVID-19 shock, which presents liquidity challenges first and foremost, can unearth underlying solvency problems and can also turn liquidity problems into solvency ones if improperly managed.

We’re already seeing some early calls for an international debt holiday to exempt countries from paying during the COVID-19 crisis. Multilateral organizations are ...

In the past we have stressed the exposure that Turkey has to external shocks, due to its high dependence on energy imports and the major role that tourism has on its fiscal revenues.

Tourism accounts for 52% of total services exports and 12.6% of total exports.

Some of the major partners for Turkey in tourism and trade are among the most affected countries by coronavirus outbreak.

However, as a net importer, Turkey is one of the countries that benefits the most from the collapse of oil prices.

After the 2014 oil prices fall, the net effect on the current account was 1.1% of GDP.

The ghost of the 2018 currency ...

The current crisis will translate into twin demand and supply shocks, with an oil price war on top of it.

The demand shock driven by declines in the world’s main trading partners will particularly affect emerging markets which are characterized by low diversification of exports and production.

Supply chains around the world have been disrupted by factory closures, first in China and now in Europe and the US.

The markets most exposed to a potential slowdown are the major commodity exporters: Venezuela, Ecuador, Angola and the markets most reliant on Chinese and US tourism.

In most EMFI countries the tourism act...

Our EMFI Core Index has fallen 27.6% year-to-date (YTD), while Our EMFI Expanded Index has fallen 19.2%. The last two weeks have been particularly bad, with consecutive 10% declines.

Unsurprisingly, countries heavily reliant on oil have suffered the most. Among our 34-country group, almost every oil-reliant one has fallen more than the 18.3% median.

The second thing that jumps to the eye is that the riskier countries have fared proportionally worse than relatively safer countries, when excluding oil-dependent countries.

We’re also seeing several countries crossing the 10% yield threshold, usually associated with dis...

The outbreak of the Coronavirus, as well as the “oil price war” between Saudi Arabia and Russia have triggered almost complete certainty that a global recession is coming over the next quarter.

Some economists are expecting a 2-quarter rolling recession, but there is potential for the downturn to extend further if the virus reemerges after activity is unfrozen.

Emerging market debt is taking a beating in 2020 so far. The countries we cover registered a median 14.3% fall year-to-date, with the worst performer doing as bad as 60.3% down (Ecuador) and 38.5% down (Angola).

We compare indicators on 4 major categori...

February was a bad month for EM debt, as the market went into risk-off mode pushing bonds to backtrack on the gains made over the previous two months. 11 out of the 15 countries in our EMFI Core Index fell on the month, while the weighted index itself fell 5.8%, retracing below December levels.

Our Expanded Index ex. Core confirms February’s sell-off, registering declines in 21 out of 25 countries and an aggregated fall of 0.9%. Nonetheless, this fall is significantly below that of our EMFI Core Index.

Our selection of countries is clearly biased towards some large and risky high-yielders, which translates to an expectabl...

Under the context of strong economic growth, that eventually went overheated, the current deficit account has always been one of the main problems for Turkey.

Behind the deficit, the reasons that explain it can be summed up in high import dependency.

Usually, the deficit is financed through foreign direct investment, portfolio investments or by issuing debt.

Instead, Turkey has relied on international reserves and increasing debt stock.

In 2019, there was a surplus in the current account for the first time in 18 years, with 0.23% of GDP.

This print was due to the compression of imports and better performance i...

In 2019, the lira continued losing value against the dollar as a result of the trade war between the US and China, as many investors chose to reduce their risk assets. The exchange rate reached TRY/USD 6.19 in May, and the currency depreciated 14.8% in 2019.

President Erdoğan defends the unorthodox theory that a reduction in interest rates leads to a reduction in inflation, contrary to standard economic theory. Since Murat Uysal took office as the new governor of the monetary authority in July 2019, the monetary policy rate accumulates a reduction of 12.75 percentage points (pp), from 24% to 11.25%. The CBRT announced that it would ...

Tensions between Turkey and the United States continue rising after the president of Russian arms exporter agency Rosoboronexport, Alexander Mikheev, said on Tuesday that he hopes to sign a new agreement with Turkey to supply more S-400 missile systems by the first half of 2020.

Such a move could sharpen the conflict between Turkey and the United States, which suspended Ankara from the F-35 stealth fighter aircraft program, in which Turkey was a producer and buyer, as a punishment for buying S-400 batteries earlier this year. Washington also warned of possible sanctions, saying the missiles are not compatible with NATO defenses, alth...

On November 11, Moody’s rating agency reduced Turkey’s global sovereign outlook for 2020, from “stable” to “negative” by explaining that global economy downward trend and unpredictable domestic policy would slow growth and increase the risk of economic or financial shocks in 2020. "Turkey's recovery is stronger than previously expected, but the aggressive stimulus and the threat of US sanctions" poses risk to growth, Moody's said.

Due to rising frictions between US and Turkey, the country's relationship with its long-term ally have deteriorated. These frictions include tension...

On November 11, the European Union foreign ministers unveiled a system for imposing sanctions on Turkey over its unauthorized gas drilling in Mediterranean waters off the coast of Cyprus. The sanctions are directed at individuals or entities involved in these unauthorized activities, but no Turkish companies or officials have yet been targeted.

European officials did not set a timeline for implementation, giving Turkey an opportunity to back down from drilling in the vicinity before sanctions could be enforced. The decision reflects the deterioration in relation between EU and Turkey, being the latter a formal candidate to join the E...

Inflation continued to slowdown in October, with a y-o-y increase of 8.5%, from 9.3% in September. Year to date inflation stood at 10.5%. However, taking into account that these results are explained by the lira depreciation (-2.5% in three months) and lower domestic demand, it is expected that these results are short lived.

"Under a strict montetary policy stance and strong policy coordination focused on reducing inflation, inflation is projected to gradually converge to the goal," the Central Bank of Turkey stated. The Bank estimates that inflation will be 12% in 2019, 8.2% in 2020 and then stabilize at 5% in the medium t...

On October 9, despite the widespread rejection of the international community, Turkish President Receptor Erdogan announced the start of a military operation against Kurdish forces in north-east Syria. The name of the offensive is "peace spring". According to Erdogan, the goal is to create a "security zone" that separates the Turkish border from Kurdish positions.

Turkey launched its long-planned attack just a few hours after Donald Trump, president of the US, announced the decision to pull US troops out of northeastern Syria, leaving his allies on his own to fight Kurds, which Ankara considers a terrorist threat....

In September, inflation slowed down significantly from 15.01% to 9.3% year-on-year, the lowest level in the last two years. This result is mainly explained by Turkish lira stabilization and lower domestic demand in recent weeks.

September’s inflation deceleration occurred despite the aggressive monetary policy that the Central Bank of Turkey (CBRT) has been implementing since Murat Uysal assumed as governor of the agency in June.  Rates have been cut by 750 basis points since then. However, Uysal stated that the space to continue reducing rates is already limited, although Erdogan has repeatedly reiterated that he wants bo...

On September 12, the Central Bank (TCMB) cut the benchmark interest rate by 325 basis points to 16.5% from a previous 19.75%. This is the second decrease in the one-week deposit rate this year, after July`s cut from 24% to 19.75%. The institution is also expecting a decrease in September’s inflation print.

This adjustment is the second cut since the dismiss of former Central Bank governor Murat Cetinkaya. In September 2018, monetary policy rate was increased to 24% from 17.75% aiming lowering inflation pressures. However, the measure obtained strong rejection from President Tayyip Erdogan.

The set of expansionary measures...

According to the latest figures published by the Turkish Statistics Institute, the economy contracted 1.5% in the second quarter of 2019 compared to the same period last year. If analyzed with respect to the last quarter, the economy expanded by 1.2%. It is necessary to note that the calculation of GDP is under the chained volume index methodology, 2009 being the base year.

In the bulletin published by the Institute, it indicates that in the analysis of the activities that make up the gross domestic product; the total added value increased by 3.4% in the agricultural sector. On the other hand, it contracted for the remaining sectors:...

On Monday, August 26, the Turkish lira depreciated 1% against the US dollar closing the day at TRY 5,628 / USD, after having reached a maximum of 5,816 TRY / USD during the day, which the market observers described as a "flash crash". This weakening occurred after Japanese investors reduced their risk assets due to the concerns of the trade war between China and the United States.

Likewise, there was a brief plunge in the yen/lira trading comparable to another “flash crash” on Jan. 3, when Turkey’s currency weakened to a similar level due to a global market sell-off and flight from risk triggered by concer...

On July 25, the Central Bank of Turkey announced that it reduced its reference interest rate from 24% to 19.75%, after the governor of the Central Bank, Murat Centikaya, was dismissed on July 6, precisely because of his refusal to apply a rate cut despite the insistence of President Recep Erdogan.

The interest rate reduction has been the highest since 2002. According to surveys collected by Bloomberg and Reuters, most analysts expected the cut to be 250 basis points, so the adjustment far exceeded expectations. Initially, markets reacted positively since the price of the lira did not show major variations.

The bank quoted the i...

In latest update of its world economic perspectives, published on July 23, the IMF warned about the ballast effect that the Turkish economy can generate on the world economy growth for 2019 and 2020.

Although the economy had shown a surprising growth in the first quarter of this year, there is a high probability that the economic contraction will resume. In fact, according to the Istanbul Chamber of Industry, operating conditions in the manufacturing sector deteriorated at an accelerated pace in July.

The IMF forecasts that the Turkish economy will contract by -2.5% in 2019 and, therefore, generate downward pressure in the regi...