Turkish Lira – Buyers’ Remorse?

By Natalia Gurushina , Chief Economist, Emerging Markets Fixed Income Strategy, VanEck Turkish assets are under pressure – in part due to thin pre-holiday liquidity, but also due to skepticism about the reform agenda. South Africa’s double rating downgrade – not surprising but not welcome either. Turkish assets got “roasted” early during the Thanksgiving week, with the lira weakening by as much as 4% at some point in the morning trade. Thin liquidity and some profit-taking might be to blame, but we suspect that there is also some “buyers’ remorse” as authorities are yet to prove that the policy U-turn is genuine. The last week’s rate hike was a good start, but the central bank did not over-deliver, and President Tayyip Erdogan’s dislike of high interest rates remains an issue. The market is also waiting for more information about the new Minister of Finance’s policy agenda. South Africa’s double rating downgrade by Moody’s and Fitch (with negative outlooks) had a limited market impact. First, it was not completely unexpected – the country’s fiscal metric is among the weakest in emerging markets, the debt-to-GDP ratio is rising fast, and there are major structural impediments to growth. Second, the sovereign had already been rated “non-investment grade” by all three agencies. That said, further rating downgrades to single-B can affect bond investors with mandate restrictions – which is why we keep a very close eye on South Africa’s structural developments and reform plans. The current account outlook for emerging markets continues to improve, with the 2020 expected surplus gradually approaching 1% of GDP (compared to 0% of GDP back in April-May). However, there are regional differences. The largest surpluses are expected in Asia, but the biggest adjustment (nearly 2% of GDP) is seen in LATAM (see chart below).