Turkey’s risk grade far from safe
Turkey’s risk premium has sharply decreased over the past several months, but an array of economic and political factors threatens to undo the trend.
Turkey’s risk premium has significantly eased since Ankara abandoned a much-criticized interest rate policy to salvage its crisis-hit economy in November, but the downtick could well reverse down the road amid ongoing economic and political issues, including Turkey’s thorny ties with the United States and Europe.
The risk premium — a major indicator that foreign investors consider before putting money in a given country — is reflected in credit default swaps (CDS), which are essentially financial deals that determine the cost of insuring exposure to a country’s sovereign debt. The higher a country’s CDS premium, the higher its borrowing costs, as the CDS premium inevitably adds to the price of borrowed money in addition to interest rates.
Turkey’s risk premium stood at about 275 basis points in February 2020 before COVID-19 officially arrived in the country the following month. It hit nearly 600 bps by October as the pandemic wreaked havoc on the already ailing Turkish economy, and Ankara insisted on keeping interest rates low despite the slump of the Turkish lira and rising inflation. In an abrupt move that reversed that policy, Ankara replaced its Central Bank governor and treasury and finance minister in November. Since then, Turkey’s risk premium has decreased, easing to about 290 bps in the first week of February. Still, Turkey’s risk premium remains well above those of peer emerging economies.
The specter of a renewed surge can hardly be ignored as the country’s economic and political fragilities threaten to deepen.
