Turkey is set to join Euroclear Bank, one of Europe’s largest central securities depositories, enabling investors to settle trades in its government bonds—but the news was not met with unbridled enthusiasm by global analysts, with one saying that the Turkish market has become an irrelevance for many foreign fund managers.

Turkey is intent on attracting more international capital at a time when its foreign investment pool has sunk to a record low amid the volatile Turkish markets and big question marks over whether the ‘Erdoganomics’ and economic management of strongman president Recep Tayyip Erdogan and the alleged scheming behaviour of his officials in areas such as the offshore trading of the Turkish lira can only see the country lurch from one crisis to another.

Eight years of talks

The deal between the Turkish government and Euroclear, a Brussels-based settlement house used by international investors to conclude their deals and safeguard collateral, was struck after eight years of talks. Stephan Pouyat, Euroclear's head of capital markets, said the agreement would open up Turkish debt to cautious investors such as sovereign wealth funds and pension funds, some of which will only invest in markets that boast an agreement with the depository. “Those who are in our ecosystem who have a strategic intent to invest in Turkey, they will feel much more comfortable now,” he said.

He added: “The new legal and regulatory framework now enables Euroclear to extend our offering and provide a simple, efficient, cost-effective, risk-minimizing way of accessing the domestic Turkish government debt market.”

However, Charles Robertson, chief economist at Renaissance Capital in London, greeted the announcement of Ankara’s deal with Euroclear by telling the Financial Times that Turkey has become an irrelevance for many fund managers, remarking: “I just find it easier to encourage investors to look almost anywhere else.”

He added: “We think it’s best not to have a position in Turkey at all.” The country’s shrinking presence in stock and bond indices made it easier for international investors to avoid, he also noted.

Holdings at record low

Turkish central bank data showed non-resident holdings of lira-denominated government bonds dropped from $14.8bn at end-2019 to just $7.1bn at end-May, marking the lowest level since records began in 2012. The outflows came amid a cumbersome debt repayment schedule that threatens to stretch government finances and intensify pressure on bonds.

Investors have also been put off investing in Turkey by ultra-aggressive monetary easing—designed to fuel Erdogan’s redoubled growth-at-all-costs economic strategy in the wake of the country’s recession last year triggered by the August 2018 lira crisis—that has seen a whopping 1,575bp slashed from the Turkish benchmark rate since July last year. Regulators, meanwhile, have made it tough for portfolio managers to place bets against the lira by slapping limits on the supply of the Turkish currency to most overseas financial institutions.

“Turkish monetary policy is unsustainable in the long run and we think there is a growing risk of capital controls,” Viktor Szabo, a fund manager at Aberdeen Standard Investments, said.

The Turkish Treasury said the deal with Euroclear would increase international investor access to Turkish lira, euro, dollar and gold denominated local government debt issues.

Turkey’s finance minister Berat Albayrak, who telegraphed the Euroclear deal last week, said the agreement was a milestone and that the ability to “tap into the liquidity provided by international investors through Euroclear is important for the continued development of our local debt markets”.

“By making our TL, USD, EUR and gold denominated domestic borrowings entirely ‘Euroclearable’ we have further aligned our capital market framework with the globally recognized standards,” Albayrak said in a statement.

Euroclear holds more than €30tn of assets under custody on behalf of banks, asset managers and pension funds. It settled securities transactions equivalent to €837tn last year.