Capital inflow hope and fear for Turkey

Reuters - LONDON

Turkey is looking forward to drawing more capital for its giant projects but analysts think the main destination for inflowing money will be stock markets. DHA photo

The coveted investment grade rating has arrived in Turkey and foreign capital may follow - possibly a lot of it. But here’s the multi-million lira question: What kind of cash will it be?
What Turkey desperately wants is long-term bricks-and-mortar investment into factories and infrastructure.

What it is more likely to get initially is more interest in already booming stock and bond markets - and possibly a fresh battle in its war against currency appreciation.

An investment grade rating, which Moody’s gave Turkey on May 16, potentially opens Turkey to more conservative funds. It could lead to inclusion in global debt indices tracked by trillions of dollars and might cut borrowing costs for the government and companies.

“This could bring a whole new investor base to Turkey,” says Tim Ash, head of emerging markets research at Standard Bank.

Not surprising then that bond yields tumbled to fresh record lows, stocks hit new all-time highs.

Average yields on Turkish sovereign dollar bonds fell to around 3.6 percent, trading for the first time below erstwhile emerging markets darling, Brazil.

But compare this to what an investor would receive on “safe” bonds from the United States or Germany or the 4 percent or so that debt-ridden Spain is paying for 10-year euro risk.
An investment grade Turkey might well attract that marginal yield-seeking dollar.

Not a game changer

But the promotion to investment grade, while welcome, is not a game-changer.

Turkey already trades as an investment grade market and despite the latest rally, the move is unlikely to be a significant trigger for more huge inflows, says Angus Halkett, a fund manager at Stone Harbor Investment Partners in London.

At last count, Turkey had a record $150 billion in overseas investment in its stock and bond markets.
Two-thirds ofIstanbul’s equity free float is in foreign hands and Turkey is fund managers’ biggest net overweight in emerging markets, a Bank of America/Merrill Lynch poll showed this month.

The proof is also in debt insurance costs that are below those of investment grade peers, Russia and South Agrica, and in bond yields that are negative when adjusted for inflation.