Do you remember Mario Draghi’s catchphrase, “whatever it takes”, when he addressed the markets as ECB President at the peak of the 2012 sovereign debt crisis? It was a powerful speech demonstrating both engagement and conviction and acted as a permanent relief pill for investors.
Thinking about engagement in emerging markets (EM), it is hard to find a country where corporates, banks and government officials are more willing to be engaged with investors than Turkey.
The ‘country of tradesmen’ has a lot of positives going for it, including supportive demographics, a strategic location connecting East and West, a skilful and educated labour force that supports a high potential growth rate, as well as a relatively low debt burden. Very few countries in the world can boast such a favourable combination.
Yet Turkey is also among the few countries in EM that investors are notably underweight, reflecting the level of concern in the marketplace. When asked what worries them about Turkey, investors point to an unorthodox monetary policy mix – or policymakers’ unwillingness to hike rates against rising inflation – as the key factor justifying their cautious stance.
Our job as investors is to understand which risks we can control or influence and which ones we can't. Where we have opportunities, we should engage.
It’s quite a remarkable outcome in the context of other EM countries that, in my view, face much bigger issues that are more structural in nature and difficult to resolve. This includes those that are almost impossible to predict (Russia/Ukraine war) and others that face serious debt sustainability challenges (some of the Sub-Saharan countries), a policy vacuum in China when it comes to the largest sector in the economy and a shift to the left in Latin America, to name a few.
In the grand scheme of things, isn’t the Turkish problem the easiest to fix?
Our job as investors is to understand which risks we can control or influence and which ones we can't. Where we have opportunities, we should engage.
That is why I hopped on a plane for a short trip to Turkey last week to see if we could exchange views with policymakers.
The good news is they were engaged. Even those at the highest, most senior level were prepared to take the time, exhibiting a genuine willingness to listen. There is a very clear message that our engagement is welcome. This says a lot, especially against a backdrop of geopolitical escalation and a long list of other pressing issues, both within Turkey and across the global arena. Of course, it remains to be seen whether our frank discussions will bear any fruit.
In a world of uncertainty and fat tail risks, a pragmatic approach can go a long way in convincing investors to give an issuer the benefit of the doubt.
...following the Russia/Ukraine escalation, any ‘winners’ in the region could benefit from substantial portfolio flows. Will Turkey take this seat?
Historically, Turkish leaders have surprised us a number of times with their pragmatic approach. I hope they can do this again. Given that a large portion of the EM universe in the EMEA region has become virtually uninvestible following the Russia/Ukraine escalation, any ‘winners’ in the region could benefit from substantial portfolio flows. Will Turkey take this seat?
The betting odds today are clearly low, as highlighted by investors’ positioning, but the reward for orthodoxy is high. Implementing a “whatever it takes” approach to tackling inflation could take Turkey from the most underweight position in the region to a key recipient of portfolio flows. Policymakers embracing Draghi’s three-word catchphrase would likely achieve precisely what they are striving for: lower inflation, renewed confidence in the economy and, ultimately, a path to reviving growth.
Polina
The view from my window of the famous Bosphorus Bridge connecting Europe and Asia in Istanbul
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