US giant Vanguard investing in Turkish currency government bonds, sees country's external funding situation improving

By Nuran Erkul

LONDON (AA) - Vanguard, the world's second-largest investment firm, recently decided to re-engage with local currency government bonds in Türkiye following its shift in macroeconomic policies, a senior portfolio manager at the company told Anadolu exclusively.

The US-based asset manager, with about $8 trillion in assets, hailed changes in Türkiye's macroeconomic policies as "very positive," in the words of Nick Eisinger, Vanguard's co-head of emerging markets active fixed income, responsible for the firm's active emerging markets strategy.

"We think this is a very positive series of developments, and our assessment is that it should be lasting rather than temporary," he said.

After his election victory last May, Turkish President Recep Tayyip Erdogan revamped his financial team. The new economic administration pledged to focus on fiscal discipline, gradual monetary tightening, and structural reforms, a focus welcomed by foreign and domestic investors alike.

In June, the Central Bank began a decisive cycle of monetary tightening, delivering an aggressive 650 basis points hike.

Since the beginning of last year, the bank has raised its policy rate a total of 3,400 basis points from just 8.5% to 42.5%. In its latest meeting in December, the bank signaled it would slow the pace of tightening as it was close to the level required to establish a disinflationary trend.

"Policy shifts will feed through to improved fundamentals and an easier funding outlook for Türkiye. It will also pave the way for a return of foreign interest in local market/currency assets in Türkiye," said Eisinger.

- Current path of monetary and regulatory policy changes should continue

On Vanguard's investments in Turkish assets, Eisinger said: "We have always held Turkish sovereign credit in our portfolios and more recently have decided to engage with local currency government bonds given the moves in interest rate policy from the Central Bank, the future inflation path, and the fact that Turkish government local bonds are very under-owned by foreign investors."

He said the firm sees the external funding situation improving as higher rates have seen a reduction in US dollar deposit liabilities across the banks and are allowing the Central Bank to rebuild gross and net reserves.

International reserves of Türkiye's Central Bank in the week ending Jan. 12 totaled $139.8 billion after hitting a record high level of over $145.5 billion on Dec. 15-22.

Eisinger underlined that the current path of monetary and regulatory policy changes in the country should continue.

"Over time we should see inflation ease which may allow the Central Bank to move interest rates back down, but this should not be premature," he noted.

After hitting a 17-month low in May 2023 at 39.59%, Türkiye's annual inflation increased to a 13-month high of 64.77% in December 2023. According to the government's medium-term economic program released in September, year-end inflation rate was projected at 65% for 2023, 33% this year, 15.2% in 2025, and 8.5% in 2026.

International rating agencies, including Fitch Ratings, S&P Global, and recently Moody's, have all revised their outlook on Türkiye.

In September, Fitch revised its outlook for Türkiye from negative to stable and affirmed its B rating, while S&P Global revised its Türkiye outlook from stable to positive last month, affirming the country rating at B.

Moody’s revised Türkiye's outlook to positive from stable, last Friday affirming its B3 credit rating.

"The country most likely will receive credit rating upgrades in the near future, although we do not envisage a return to Investment Grade rating status for some time," Eisinger said.

"As an active bond manager, the ratings are not especially important for us from a fundamental perspective, although they can influence inflows, especially when ratings move from non-investment grade to investment grade or vice versa."​​​​​​​