The Turkish lira strengthened 0.5% against the dollar and stocks rose to a three-week high on August 8 after Moody’s delayed its rating decision for Turkey. The improvement in global investor appetite towards emerging markets also supported Turkish assets.
The lira was trading at 2.9824 per dollar. The main stock exchange index, BIST-100, ended the day 2.25% higher.
The yield on the five-year government bonds fell 19bps to 9.62%. Turkey’s 5-year credit default swaps (CDS) fell to 248 basis points, the lowest since July 19.
On August 5, Moody’s decided to delay a potential downgrade, saying that it is still assessing the impact of last month’s coup attempt on the economy. The rating agency will complete the review within 90 days of the July 18 announcement.
The lira and BIST-100 fell ahead of Moody’s decision last week, on poor inflation data. Consumer prices rose more than expected in July, increasing 1.16% m/m, driven by the sharp rises in food and tobacco goods prices.
Investors are now keeping a close eye on President Recep Tayyip Erdogan’s meeting with his Russian counterpart Vladimir Putin on August 9.
Any improvement in relations between the two countries will mean potential benefits for the Turkish economy if Russia eases the sanctions it imposed after the downing of one of its bombers by Turkish jest near the Syrian border last November. Turkey will also be able to attract more Russian tourists.
Turkey’s exports to Russia plunged 62% y/y in July.
But, ironically, the lifting of the ban on imports may put extra pressure on food prices as Turkish companies will ship more products to Russia, leaving less food available in local markets.
Despite all these challenges, VTB Capital sees buying opportunities for Turkish equities. The valuations look attractive for the Turkish equity market, and banks in particular, outweighing the risk factors, VTB said in a recent report.
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