The latest data shows no meaningful change in bond market holdings by foreigners while residents have continued to bet against the market
Turkish assets have recently been under pressure given increased geopolitical risk anticipation, deterioration in the inflation outlook and unfavourable supply dynamics. We've looked at foreigners' holdings in the bond market and investigated the different approaches among residents and there are interesting differences.
Since the start of market volatility in mid-September, foreign investors maintained positions and gradually increased their holdings with the exception of one large USD600mn outflow in the week of October 13. In the last seven weeks, the cumulative inflows into the bond and equity markets were US$185 mn (USD175mn including repos) and US$268mn, respectively, showing some momentum loss in comparison to the flow outlook after the April referendum.
Thanks to a strengthening appetite this year, the share of nonresidents in the local bond market (including repo transactions) increased to 22.8% on Sep 15th from a trough of 19.1% at the end of January. This corresponds to the highest level since mid-August 2015. However, from mid-September onwards, the share has marginally dropped to 22.3% mainly because of continuing expansion in the debt stock with heavy borrowing.
Local investors continue betting against the market and smoothing the volatility in the FX market. As the TRY appreciated towards 3.42 against the USD during the course of 2017, local investors increased their FX deposits by a total of USD26.1bn between 6 January and 15 September. The USD15bn of the increase came from the households and the rest from the corporates.
However, we've seen a change in their behaviour recently. Local investors did just the reverse and sold USD10.0bn when the TRY depreciated towards 3.80s against the USD in the previous seven weeks. One thing that attracts attention is the behaviour of corporates as they have not reduced their deposits in the latest turmoil that much, with a mere USD0.8bn, while households have been the major sellers. So, this may be attributable to corporates' FX debt repayments and/or their expectation of further TRY weakness before stabilisation.
So far the impact of the CBT actions on the currency has been limited, though recovering tension with the US after the Turkish Prime Minister's visit will likely help recovery and support the effectiveness of these moves. Currently, the CBT’s gross FX reserves stand at USD96.3bn, while ~USD22bn of which comes from the reserve option mechanism (USD13.6bn worth of gold also held under this flexibility vs USD41.3bn for banks' FX reserve requirements) which will be a buffer in the case of difficulty in FX liquidity.