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perhaps prove more successful if Turkey’s finance minister gave up talking about financial matters or the Erdogan press stopped publishing financial stories. Albayrak, who remains under intraparty pressure despite providing everyone with pretty pinkish official macro figures, also purportedly told financial media representatives that they should put the question of whether there is to be a cabinet reshuffle to his father-in- law.
The 'real rate' After transferring inflation targeting to the TUIK, the central bank is presently targeting “a reasonable rate of real return” to attract some portfolio inflows. It is also obviously pressing as hard as possible on the USD/TRY rate to persuade Turks to sell their dollars. “The reasonable rate” seems like the latest contribution to local central banking terminology by the central bank’s non-central banker governors. However, international observers are more comfortable in calculating real returns as they do not have to spend time with “interest rate corridors”, they use the main policy rate in their analysis. To determine the level it deems “reasonable,” the Turkish central bank assesses variables that include the portfolio preferences of domestic investors and real rates in peer countries such as South Korea, Brazil and South Africa, according to Uysal. “The reasonable real rate for us corresponds to a monetary stance that’s mindful of the economy’s internal and external balances and also maintains a continuation of an inflationary decline. This concept must also consider the balancing in financial flows,” he said. The Turkish government has systematically spooked private lenders by imposing lower rates via public lenders in domestic debt auctions since last November, while it “requested” that the banks buy more government debt earlier this year after its eurobond channel was temporarily inaccessible. Last month, the government managed to raise $2.25bn from a eurobond sale and it is currently aiming to benefit from the Fed easing by securing portfolio inflows.
Under these conditions in Turkey’s singular environment, it becomes a matter of bravery for sole traders, or a matter of inside information for investment funds, that want to enjoy the high real returns on lira government bonds.
Average real yields on Turkish bonds have now turned negative, according to data compiled by Bloomberg. That suggests that some “people with knowledge of the matter” have already written up their profits. “But [Turkish government bonds] still [yield] 15.5% in nominal terms, which is enough to entice significant inflows, especially with the world’s major central banks being dovish. A falling inflation rate would serve to make the trade that much more attractive,” the Bloomberg story added. Portfolio inflows are always welcomed by Ankara, but it was as recently as the end of March when foreign investors were ‘kidnapped’ by Turkish officials who shut down offshore lira liquidity on the London swap market.
According to latest data out of the finance ministry, non-residents’ share in the government’s domestic debt stock stood at 10.8%, or TRY79.4bn, as of June. The share of foreigners has gradually declined, moving down from 19% in April 2018 to 10% in May this year. As of July 19, portfolio outflows from Turkey’s domestic government bonds amounted to $2.47bn so far this year, according latest central bank figures. That came on top of the $906mn of outflows seen in 2018. On some days not a single transaction occurs even with Turkey's benchmark government bonds since the government has spooked private investors to lower interest rates.
JPMorgan Chase & Co anticipates that Turkey’s capital markets will return to life as the country’s inflation and interest rates decline, Mustafa Bagriacik, chief executive officer of the lender’s Istanbul unit, said in an interview with Bloomberg on August 2. “IPO demand is accumulating in Turkey and when markets normalize, there should be initial public offerings, secondary public offerings and accelerated book buildings,” he said, adding: “Demand and risk appetite for Turkey will be there once predictability is there; because
15 TURKEY Country Report August 2019 www.intellinews.com