Turkiye’s CDS fell to 319 basis points from 700 basis points in May, falling to its lowest level since March 2021.
The decline in Turkiye’s 5-year credit risk premium (CDS), which also reflects foreign investment interest in Turkish lira (TL) assets, continues.
The decline in CDS continues with the determined steps of the Central Bank of the Republic of Turkiye (CBRT) towards establishing disinflation and the international fund flow to TL, despite ongoing geopolitical risks.
While the steps taken by the new economic management have increased the interest in TL assets by reducing the uncertainties regarding the Turkish economy, it is stated that these steps have also received international response.
During this period, the CBRT increased the policy interest rate from 8.50% to 40% within the scope of the fight against inflation, and also took many simplification steps. CBRT’s total reserves reached their highest level, exceeding $140 billion, with the policies implemented by the new economic management. The continued decline in dollarization and foreign inflows to the stock and bond markets have also recently supported the Central Bank’s net reserves.
With the increase in predictability for the Turkish economy, Turkiye’s 5-year credit risk premium has also started to decline. Turkiye’s CDS decreased from 700 basis points in May to 319 basis points for the first time since March 2021.
During this period, international credit rating agencies took steps to improve Turkiye’s rating outlook. Finally, Standard & Poor’s (S&P) made an off-calendar assessment due to recent policy regulations in Turkiye and confirmed Turkiye’s credit rating as “B” and changed its credit rating outlook from “stable” to “positive”.
Analysts stated that international credit rating agency Moody’s is expected to evaluate Turkiye after the markets close on Friday, December 15, and that Moody’s may make an improvement in Turkiye’s credit rating and rating outlook with the impact of these developments.
“Carry trade” opportunities report in TL from Deutsche Bank
Meanwhile, in Bank of America’s report released yesterday, “We believe that Turkish private banks offer good value in terms of return on equity with a sustainable 30%.”
In the “CEEMEA Strategy Notes” report prepared by Deutsche Bank, it was stated that carry trade in TL is in an upward trend. We moved to the optimism side of the lira in late September due to the authorities’ determination to move towards more orthodox policies and our belief that there is a strong incentive for them to keep the nominal exchange rate stable in the near term to meet disinflation and dollarization targets.”
The report stated that one of the most important upward signals was the return of carry trade transactions in TL, and noted that with the improving current account balance, the dollar/TL exchange rate has remained stable for 6 months despite high inflation.
The report emphasizes that it is difficult to measure the exact size of carry trade inflows in TL and says, “However, three pieces of evidence stand out. First, there has been a significant improvement in the CBRT’s net reserves in recent weeks. Secondly, local banks’ off-balance sheet foreign exchange position, excluding CBRT swaps, showed a significant jump. Thirdly, local banks’ foreign exchange swap transaction volumes increased significantly.”
The report also pointed out that there are some risks for carry trade in TL and noted the following:
“But in the near term, authorities deserve credit for carefully balancing priorities between fighting inflation, foreign exchange and reducing the KKM. Another positive catalyst will be the loosening of local banks’ restrictions on offshore swap risk, as Treasury and Finance Minister Mehmet Simsek recently pointed out. A further increase in interest rates at the December meeting will be another positive development for carry trade.”
Carry trade means borrowing in the currency of a country where interest rates are low and earning interest returns from another country that earns high interest.
Analysts noted that investors’ expectations regarding the course of the exchange rate are important regarding carry trade, and said that predictability is vital as the exchange rate in the country visited in order to obtain high interest may negatively affect the interest income to be obtained.
Source: AA / Prepared by Irem Yildiz