Foreign investors are flocking to Türkiye's local debt markets, noting they are impressed by interest rate cuts and easing inflation and are hoping that a regional transformation, including developments in Syria, could further boost their bets on the major emerging economy.
The Turkish central bank cut rates by another 250 basis points on Thursday to 45%, continuing an easing cycle it began just last month after a long tightening drive to curb increase in prices.
More than a year and a half after President Recep Tayyip Erdoğan's reelection and pivot back to more orthodox economic and monetary policies, Türkiye is back to being a mainstay of emerging market investors.
"Türkiye 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," he told Reuters recently.
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. Yet, recovery is tangible.
Türkiye entered a period of disinflation, with the annual inflation rate dropping to 44.38% in December, compared to 75% in May and 85% at the end of 2022.
The move toward more conventional policies was meanwhile often commended by international financial funds, top lenders and rating agencies, including Moody's, in its last assessment on Friday.
The more favorable recent backdrop has also seen Amundi, Europe's largest asset manager, venture into domestic bonds.
"We like Türkiye from a local currency perspective," said Yerlan Syzdykov, global head of emerging markets and 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%.
Moody's Ratings, on the other hand, has completed its periodic review of Türkiye's credit ratings, reaffirming the government's long-term issuer rating at "B1" with a positive outlook.
The significantly tightened monetary policy stance has increased confidence in the Turkish lira, setting in motion the economy's rebalancing away from unsustainably buoyant domestic demand, reducing inflationary pressures, Moody's said in its periodic review of Türkiye on Jan. 24.
The report commends Türkiye's resilient and diversified economy, which has shown signs of stabilization following recent policy shifts.
"The government of Türkiye’s credit ratings are supported by the country's large, diversified and resilient economy, a moderate government debt burden and improving monetary and macroeconomic policy effectiveness," the agency said.
These strengths are balanced against institutional challenges and external vulnerabilities, it added.
It also said that "the return to more orthodox economic policies is credit positive" but warned that "sustainably reducing Türkiye's macroeconomic imbalances will take time."
Pointing to a decline in inflation to 44.4% in December, Moody's said it expects disinflation to continue in 2025.
It also said that the rating could be upgraded if "authorities continue to effectively implement policies that restore macroeconomic stability, reduce inflation on a sustained basis, achieve lasting de-dollarization of the economy and rebalance growth away from credit-driven domestic demand."
In July last year, Moody’s raised Türkiye's long-term foreign- and domestic-currency issuer and foreign-currency senior unsecured ratings by two notches, from "B3" to "B1" with a positive outlook.
Moreover, analysts predict that the recent developments in the Middle East could also positively reflect on Turkish economy.
While the government may be less inclined to push for high growth for now, recent regional developments – including the ousting of Bashar Assad in Syria and the Israel-Hamas cease-fire in Gaza – could add to Türkiye's growth momentum, analysts said.
"Everything that's happened in the Middle East is probably quite positive for Türkiye," said Magda Branet, head of emerging markets and Asian fixed income with AXA Investment Managers.
"Türkiye 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."
