Turkey’s Debt Risk Surges as Nation Looks to Runoff Election

Selcuk Gokoluk
·1 min read
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(Bloomberg) -- Investors are demanding the highest risk premium for Turkey’s sovereign dollar bonds in almost 10 months, as the prospect of a runoff election damps some hopes for an end to unorthodox economic policies.

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At 661 basis points over US Treasury yields, Turkey is now paying a higher premium than some similarly-rated countries such as Honduras, Iraq and Mongolia, which have traded at or near distressed levels in recent months, according to a Bloomberg index tracking emerging market debt. The spread was at 456 basis points on the last day of trading before the inconclusive presidential vote at the weekend.

The stronger-than-expected support for President Recep Tayyip Erdogan has wrong-footed some investors hoping for an end to his unconventional economic policies, which include interest-rate cuts to boost growth even as inflation surged, and selling central bank reserves to keep the currency stable.

“It’s bad news for investors, as it implies a heightened probability of the continuation of bad structural and macro policies,” Cem Karacadag, head of emerging markets sovereign debt at Barings, wrote in emailed comments.

“All the nominal variables are wrong – interest rates, exchange rate, and prices – so savings and investment decisions become short-sighted, if not impossible,” Karacadag said, adding that current situation was “not a tenable investment thesis for investors.”

The prospect of a potential post-ballot reversal of Erdogan’s policies — which have sparked the worst inflation crisis in decades and led to an outflow of international capital — had recently fueled a rally in Turkey’s bonds and stocks.

Erdogan, who has been in power for two decades, will face Kemal Kilicdaroglu in a second round on May 28.

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