Recep Tayyip Erdoğan and Abdel Fattah al-Sisi greeting each other warmly was not the only surprise of the World Cup opening. Bizarre self-justification from beleaguered Fifa president Gianni Infantino — “bullied at school because I had red hair” — will be swiftly forgotten. The rapprochement of the previously hostile leaders of Turkey and Egypt will not. Investors should take note.
Erdoğan has not recognised Sisi’s government since it deposed elected president Mohamed Morsi, who was close to the Muslim Brotherhood. This pitted Turkey and Qatar, which are friendly to the brotherhood, against Egypt and Gulf states led by Saudi Arabia and the UAE.
Erdogan’s rapprochement with Sisi will go down well in Riyadh and Abu Dhabi. He must hope it will increase Gulf funding. Turkey’s current account deficit is heading above $40bn. Erdoğan needs help to prevent further depreciation of the lira. Hinting at a quid pro quo, he told reporters that relations with Egypt and others could be reset after June elections.
Erdoğan battily believes high interest rates cause rather than cure inflation. So foreign capital inflows provide the only real support for the lira. However, overseas investors own less than 1 per cent of Turkey’s domestic government debt. With local 10-year bonds yielding 11 per cent and inflation running at 85 per cent, it is easy to see why.
Foreigners do own Turkish eurobonds. Ankara sold $1.5bn of five-year bonds this month at a yield of 10 per cent. While that is expensive, Turkey would have paid more a few months ago. The cost of default insurance has almost halved since July. Investors have warmed to emerging markets in the belief the US will start cutting interest rates next year.
Gulf states may now invest in Turkey for political reasons. Independent investors should stay clear for financial motives. The more funding Erdoğan can source from the Saudis and Russia, the less pressure he will be under to abandon his ruinous economic policies. These will eventually hurt backers of every stripe.
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