Turkish lira bonds are expected to lose their appeal in at least the next six months, according to Christian De Clemente, director of emerging market debt at AllianceBernstein, due to high inflation and currency deterioration.
This comes as the government cuts its GDP forecast for 2025, announcing that it will be forced to make temporary concessions at the growth level to curb inflation. The government lowered its economic growth forecast for 2024 from 4.5 percent to 4 percent. That’s still well above the 3% forecast in a Bloomberg survey of 26 economies. The growth forecast for this year has also been lowered to 3.5% compared to the previous forecast of 4%.
In a presentation of the program in Ankara, Finance Minister Mehmet Şimşek explained that the potential negative effects on growth as a result of inflation-curbing policies will be temporary, stressing that the priority now is to reduce inflation below 10% and keep it at this range.
Impending volatility
De Clemente explained that his company has not added many lira bonds through its fixed income platforms, given expectations of volatility in Turkey over the next two quarters, amid fears of low interest rates and early monetary easing that could weaken the currency.
Although inflation in Turkey fell to 52% annually in August as borrowing costs rose to 50%, weakening demand, this figure is still far from the central bank’s official target. The lira has also fallen more than 13 percent this year, making it one of the worst performing currencies outside Latin America.
De Clemente noted that Alliance Bernstein has selectively traded Turkish bonds this year, adding that inflation will continue to decline until the end of the year, but that the central bank will not meet its target of reducing inflation to 38%. Most economists believe inflation will be closer to 42%.
As for inflation expectations, De Clemente estimates that the rate could range between 45% and 49% with the possibility of a rate cut in the first quarter of 2025, although this could be postponed to the second quarter.
Read alsoEuro hits one-week high ahead of US jobs report
Expected decline of the lira
On the currency side, de Clemente expects a further depreciation of the lira over the next six months, which could provide an opportunity to invest in the country’s assets by the second quarter of next year. Although $12 billion in foreign investment has entered Turkish bonds this year, sharp volatility points to investors’ reluctance towards long-term investments.
De Clemente concluded by saying that Turkey’s economic team has made significant progress towards inflation targets, but bigger challenges are still ahead.
This comes in conjunction with the decline of the Turkish lira against the US dollar, as it recorded a level of 34.04 liras per dollar, down by 0.2% during the day. The euro reached the level of 37.76 liras per euro, rising against the Turkish currency by about 0.1%.
On the other hand, a gram of gold in Turkey recorded about 2752 liras, up 0.16% during the day.
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