Foreign investors withdraw $7 billion from Turkey’s bond market – WSJ

Foreign investors are fleeing Turkey’s local currency bond market, adding to the woes in the indebted Turkish economy which is heavily dependent on foreign funding, the Wall Street Journal said on Friday.

Investment funds withdrew more than $7 billion from Turkey’s local currency bond market in the six months up to the end of June – the largest first half yearly drawdown on record, WSJ said, citing data from Turkey’s central bank.

Nonresidents’ ownership of outstanding Turkish government bonds has fallen to around 5 percent, down from nearly a third in 2013, WSJ said.

The bonds have grown less attractive to investors as the central bank slashed interest rates to less than the rate of inflation this year, sending the real yield on the debt to below zero.

“Turkey is becoming irrelevant for fixed-income investors,” Viktor Szabó, investment director at Aberdeen Standard Investments, told the WSJ. “The way they pulled out of Turkey is really unprecedented.”

Turkey’s economy was only just recovering from a 2018 recession when the COVID-19 coronavirus hit this year, sending a shock through the economy.

COVID-19 lockdowns have crippled the European Union’s purchases of cars and textiles from Turkey, and wiped out most of the country’s foreign-exchange revenue from tourism.

Meanwhile, Turkey’s central bank spent billions of dollars of foreign-exchange reserves and borrowed foreign currencies from domestic banks to buy lira to halt the slide in the currency.

Despite those efforts, the currency in May still slumped to a record low against the U.S. dollar before recovering slightly, leaving its retreat this year at about 13 percent

With the lira sliding, Turkey’s overseas borrowing costs have risen this year, which is spooking foreign investors.

“Nobody wants to buy long-dated bonds in Turkey anymore. It’s one of the signs of stress,” Jan Dehn, head of research at Ashmore Group, told the WSJ.

Investors are also increasingly worried about how borrowers will repay their debt, as Turkish banks issued loans to households at a record pace in the first half of the year. The government is guaranteeing debt to small and medium-size businesses to keep credit flowing.

The WSJ reported that Turkey’s central bank now owes more in foreign currencies than it has in its coffers.

Turkey’s dependence on its reserves and borrowed currencies has led to investors speculating that Ankara heading towards a balance-of-payments crisis, which would leave Turkey unable to pay for essential imports or make payments on its external debt.

In which case, Turkey would be forced to let the currency weaken and raise interest rates, reducing economic growth, or to seek a bailout, the WSJ said.