(Bloomberg) -- The relative strength of Turkey’s lira may be holding back major portfolio inflows even after a landmark shift to orthodox monetary policies that was cheered by investors, according to a senior Citigroup Inc. official.
While fixed-income investors are positive on Turkey, inflows haven’t hit the levels the bank would expect, said Omar Hafeez, the lender’s head for North Africa, the Levant and Central Asia. One reason may be that “the currency has not moved to the extent it should, contrary to what happened in Egypt,” he said in an interview in Dubai.
The Egyptian pound dropped almost 40% against the dollar in March as authorities enacted a long-awaited devaluation, helping secure an expanded International Monetary Fund program for the troubled economy. In Turkey, meanwhile, the lira is down 13.6% year-to-date. That makes them, respectively, the world’s fourth- and seventh-worst performing currencies in 2024, according to data compiled by Bloomberg.
But Turkey’s economic administration has been pursuing a policy of “real” appreciation of the lira as part of its inflation-fighting strategy, meaning effectively keeping monthly losses in the lira trailing monthly inflation. For now, officials have given no indication that a shift in that policy is coming, nor desired.
Carry Trades
Turkey and Egypt — which recently overcame a years-long political feud and are pledging closer economic ties — have been among the best carry trades for investors in the Europe, Middle East and Africa region this year. A Turkish note indexed to the central bank’s policy rate offers one of the highest yields in the world at 50%, while Egyptian Treasury bills are providing in excess of 20%.
Turkey has attracted more than $10 billion inflow in local bonds, substantially less than some predicted, after the country abandoned years of unusual monetary practices that included cutting interest rates to try and slow inflation. Since then, a combination of high interest rates and a predictable currency have made Turkey an unusually safe bet for carry traders, who borrow where interest rates are low and seek to put money to work where returns are higher.
Local elections in March were seen as “a good test for the new orthodox policy,” said Hafeez. That Turkey didn’t reverse course before an important vote means investor “confidence level has gone much higher,” he said.
For Egypt, a significant turnaround in sentiment after March’s devaluation has seen investors pour billions of dollars into the local debt market, albeit mostly for short-term T-bills. Equity investors are still cautious.
A massive $57 billion bailout of investments and loans led by the IMF and United Arab Emirates has given Egypt three to four years of a financing buffer, according to Hafeez. Now the government needs to draw in substantial foreign direct investment to help tackle its high level of debt, he said.
“Track record has to be demonstrated before people buy into investment stories,” said Hafeez. Now that the liquidity shortage is being tackled, it’s “about the execution, to demonstrate the ability to actually do the privatization deals,” he said. “And if you start seeing that, you’ll see more momentum.”
Other views on Mideast markets:
- It would “be illogical to say there is no concern among clients that Israel’s economy will be under a lot of strain the longer the war continues,” Hafeez said. But looking at statistics, “nothing material has changed.”
- While Israel’s central bank earmarked as much as $30 billion to pump into the system if required to support the currency, they ended up using less than a third of that - showing the shekel’s resilience.
- “A lot of Israeli businesses are outside Israel, or they’re serving clients outside,” so “they are protected from the local environment in that way.”
- Tunisia’s situation is “sustainable in the short term,” with enough liquidity “to meet all their upcoming obligations. Longer-term sustainability requires some sort of a reform program that includes rationalization of subsidies.”
- With “sufficient liquidity coming in from other sources there’s no urgency” for Tunisia to commit to an IMF program.
--With assistance from Kerim Karakaya and Beril Akman.
©2024 Bloomberg L.P.