Tuesday 31/03/2020

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Turkey: the referendum that confirms our fears

Responsible Investment Strategist

The results are undeniable: Mr Erdogan managed to convince a slim majority (51.4%) of the Turkish people that 72 constitutional articles needed to be modified to further strengthen his power. Hence, the Turkish president can now extend his stay in power by two additional terms in office, joining the list of long-reigning patriarchs of authoritarian regimes such as in Algeria, Chad, Cameroun and Angola.


Continuous decline of civil rights and liberties

The outcome of the referendum is widely contested amid accusations of vote-rigging and curbs on free speech, and it confirms the continuous deterioration in civil rights and liberties the Turkish people have experienced in the past few years. According to well-known NGOs in this field, in particular Freedom House, the country has seen its worst decline ever of individual liberties and political rights. The democracy index, published by The Economist Intelligence Unit, also confirms the worsening situation, especially since the failed coup attempt which took place on July 15 of last year.

The NGO Freedom House, which works with around one hundred experts in democracy and human rights, geographically compares the country with Western European countries, of which it has the worst score. There has been a lack of freedom of the press for several years, and although Turkey is still considered as ‘partially free’ in terms of civil liberties and political rights, it has lost its status as an electoral democracy. Hence, in the latest ranking made by that NGO, it received a negative outlook, which suggests there are major issues which may result in the downgrading of its democratic rating.

Over the last few years, the democratic situation in Turkey has deteriorated progressively. Specifically, the country has seen its position deteriorate the most over the past few years, with only the Central African Republic doing even worse. In terms of civil liberties, it is ranked between the Kyrgyz Republic and Madagascar.

Liquid and attractive debt

The constantly declining adherence to democratic values is key to our assessment of investments in Turkey. Investors, who are aware of the relatively high default risks, often like Turkey’s sovereign debt as it is liquid and has an attractive yield. It represents nearly 8% of major local-currency government bond indices. In order to assess its appeal, Turkish debt is often compared to that of South-Africa, which - although it has little in common with Turkish debt - offers a similar liquidity and yield profile for a risk which is comparable overall.

Insufficient yield in the face of its sustainability profile

Turkey differs from South-Africa on a range of sustainability indicators, in particular population, wealth distribution and healthcare, as well as on the major economic indicators. Indeed, it has less social inequality, and there is better preventive health care, in particular for children, with the result being lower child mortality rates and increased life expectancy.

Comparison between South-Africa and Turkey – 5 pillars of sustainability

However, transparency and democratic values are at the core of our proprietary country sustainability model, and in this regard Turkey exhibits a much lower score, among the lowest in the universe of 87 emerging market countries.

Transparency and democratic values

Although in theory Turkish debt is eligible for investment as the country is not (yet) considered as not-free like Russia and China, our investment strategy in local-currency emerging market debt has always refrained from investing in Turkish paper.

The latest developments confirm our fears, and they do not suggest that we will consider investments in Turkey any time soon.