Foreign investors are flocking to Turkey's local debt markets, saying they are impressed by interest rate cuts and easing inflation and are hoping that a regional transformation could further boost their bets on the economy.
Turkey's central bank cut rates by another 250 basis points on Thursday to 45%, continuing an easing cycle it began just last month after an aggressive drive to end years of soaring prices and a tumbling currency.
More than a year and a half after President Tayyip Erdogan's re-election and pivot back to more orthodox economic and monetary policies, Turkey is back to being a mainstay of emerging market investors.
"Turkey is one of the bigger success stories, one of the positive dynamics in our space that we like," said Nick Eisinger, co-head of Emerging Markets with Vanguard.
"The reform story and the macro story is very positive and still has runway to go."
Local bonds sucked in $1.24 billion of foreign investor cash in the week to Jan 17, the biggest such inflows in two months, bringing the 2025 tally so far to as high as $1.9 billion, central bank data show. Foreigners hold more than 10% of government debt, levels last seen in 2019.
While that is a sharp increase from around 1% in 2022, it is still less than half of the 25% prior to August 2018, when the lira crisis started.
Emerging from that crisis has been painful.
Turkey for years opted for unorthodox fiscal and monetary policies that fuelled red-hot growth. It claimed the top spot for economic growth among larger emerging markets since the onset of the COVID-19 crisis, according to Oxford Economics.
But those exposed to local bonds paid a hefty price: with inflation topping 85% in 2022 and touching 75% last year, and a lira tumbling to a series of record lows, a big chunk of investments were wiped out.
DISINFLATION
The more favourable recent backdrop has also seen Amundi, Europe's largest asset manager, venture into domestic bonds.
"We like Turkey from a local currency perspective," said Yerlan Syzdykov, global head of emerging markets & co-head of emerging markets fixed income at Amundi.
"The pace of the disinflation should continue being higher than the pace of devaluation - so that's the bet that we have as well."
A Reuters poll shows the central bank is expected to forge ahead with cuts that leave its key rate at 30% at year-end, when the bank itself expects inflation to slow to about 21%.
While the government may be less inclined to push for high growth for now, recent regional developments - including the ousting of Syrian leader Bashar al-Assad and the Israel-Hamas ceasefire in Gaza - could add to Turkey's growth momentum, analysts said.
"Everything that's happened in the Middle East is probably quite positive for Turkey," said Magda Branet, head of emerging markets and Asian fixed income with AXA.
"Turkey will probably be an actor in the reconstruction of the region and in the reconstruction of Ukraine... So on the growth outlook and the fiscal outlook there's definitely some positive news."
Turkey still has to prove its orthodox pivot will last before it lures back so-called crossover investors: the major developed-market investors who also dabble in emerging markets. Often managing big pots of money, they have in recent months sought exposure to emerging economies, especially investment-grade rated sovereigns in the Gulf or Latin America.
"From their perspective, it's too risky to go into Turkey because of these factors... on the geopolitical side, but also because of the fragility of the institutional space," said Amundi's Syzdykov.
