Lower Oil Prices Increase Investor Appeal in Turkey – For Now

“We believe that the Central Bank of Turkey would like to ease policy rates and will do so ahead of next summer’s elections. However, members of the monetary policy committee are awaiting justification from a drop in inflation expectations, which has yet to materialize,” Kalen said. “Although political risk remains a consideration, the new prime minister Ahmet Davutoglu’s administration has been notably hands-off with respect to central bank operations, allowing the central bank leeway and independence in conducting monetary policy, and investors have recognized this as a favorable turn in policy dynamics in Turkey.” As testament to that, too, portfolio outflows from Russia have been benefiting high-yielders such as Turkey and South Africa, and “we’ve seen corresponding pick-ups in flows into the Turkish government bond and local rates markets.”

Turkey is also benefiting from the fall out of sanctions on Russia, and could stand to gain even further if the South Stream pipeline project goes through. Recently, Russia scrapped plans to build the pipeline through Bulgaria, a European Union country, and announced it would do the same through Turkey instead.

An infrastructure project of that magnitude, if it goes through, would definitely boost the Turkish economy, but all the same, this current windfall period for Turkey could be short lived, and investors are still wary on the whole about the country’s prospects, citing the need for deeper structural reforms as a key priority that must be addressed.

Although two out of three major elections have now passed with the party of President Recep Tayyip Erdogan successfully weathering through, structural reforms are not really accelerating as investors would like them to, said Alec Moseley, senior emerging markets portfolio manager at Schroders in New York.

Inside Turkey, the threat of instability is also high as those parts of society that are opposed to Erdogan and his rather authoritarian policies, and that were key to widespread protests in the summer of 2013, are still active and another wave of protests could kick off at any time, Moseley said.  

“It does not seem likely now but should oil prices rise, then there would be a very quick reversal of this virtuous cycle,” he said. “Now, capital flows coming into the country will drive liquidity and credit growth, which along with central bank policy and further stimulation from the European Central Bank, are helping the economy, but if things were to reverse, the virtuous cycle could very quickly become a vicious cycle.”

Turkey is not a “risk-free investment destination,” Coleman said, and at the end of the day, Turkey’s politics remain a key consideration for investors.