Nicholas Birch in Istanbul -
With less than two months to go before parliament elects a new president, domestic and international investors' risk assessment of Turkey remains diametrically opposed.
Non-residents' share of Turkey's total domestic debt stock has risen from a paltry 2.5% four years ago to 16% in February. Foreign positions in bonds have almost doubled since the financial turbulence in May and June last year. True to one of their oldest reflexes, meanwhile, Turkish investors have abandoned the lira in favour of foreign currencies, buying up $20bn since last summer.
The widely varying appetite for debt is not surprising. Outsiders see one of the highest real interest rates in the world, almost certain to drop slowly and steadily. Insiders do their best to surf the small ups and downs.
"International investors are taking positions, while the Turks are trading," says Nurhan Toguc, chief economist at the bokerage Ata Invest.
What is less clear is why local investors continue to stay away from the local currency, even now that the lira is strengthening. More striking still is the slump in the domestic share of the Istanbul stock market's free float worth between 45% and 55% for a decade to a record low of 31% last week.
In one sense, analysts say, what is happening is less a retreat of local investors than the arrival of a new generation of foreigners. For example, February 6 saw the arrival on the Turkish market of two Canadian pension funds, Ontario Teachers' Pension Plan and Canada Pension Plan. Actera Partners, the 150m private equity fund they have set up with Turkish collaborators, is the largest to date to focus exclusively on Turkey.
Analysts also point to the decline in daily trading volumes on the Istanbul Stock Exchange as evidence of the growing presence of long-term dedicated funds.
Atilla Koksal, a veteran of Turkey's equity market who co-founded the brokerage Dundas Unlu, is nonetheless convinced that Turkish investors are staying away too, a fact he blames on history.
"Risk-aversion is in my generation's genes," he says. "We've become so inured to boom and bust that we've missed the last five years' growth."
He points to Turkish investors' ongoing fondness for foreign currencies and gold, which continues to account for around a quarter of Turkish assets. Decades of burnt fingers, he thinks, are also partially responsible for the failure of investment funds to extend their client base.
That's not true of pension funds, which are new in Turkey and expanding. But mutual funds have been here since 1986, and remain marginal. "Worth $700m five years ago, worth the same today," Koksal sighs. "In real terms, they've shrunk."
In one sense, he is excessively pessimistic. For a brief period after 2004, domestic investors were exchanging dollars for lira-denominated assets.
Yet heightened as it was by political squabbling over the appointment of a central bank governor, last May's turbulence was enough to quash many Turkish small investors' hopes that the country had finally turned the corner. And the association of politics with economic instability is not likely to leave them now, with the local media speculating wildly about who will be Turkey's new president.
Turks aren't the only ones worried about what might happen in May. A former US ambassador to Ankara, Mark Parris, thinks 2007 "could be the year that literally defines the kind of country Turkey is for a generation."
To most outsiders, that sounds melodramatic: with powers to block but not veto legislation, Turkey's president is on paper much less influential than the prime minister. But his importance in a country that some would describe as less a democracy than an oligarchy with democratic icing lies in his symbolising the secular state.
Most Turkish presidents have been former military men. The thought that Prime Minister Tayyip Erdogan, a man once imprisoned for reciting a religious poem in public, might get the post has been enough for one secularist newspaper to push more or less overtly for military intervention.
Turkish big business openly supported the military's 1997 ousting of an Islamist government; it backed the 1980 coup too. In an ambiguous statement last week, though, the new head of Turkey's powerful business association TUSIAD hinted it wouldn't be doing so again.
"The parliament's election of the president will be democratic," Arzuhan Dogan Yalcindag said on March 8. Tayyip Erdogan's party has a huge parliamentary majority.
The head of the increasingly nationalist, secularist main opposition party whom Yalcindag had been talking to took her comments as a clear hint TUSIAD was supporting an Erdogan presidency. But more likely, political analyst Cengiz Candar opined in the business daily Referans on March 10, is that Yalcindag's comments were a sign "the markets have begun to buy" the idea of Erdogan bidding for Turkey's top post.
That's certainly the way Ozgur Altug, chief economist with brokerage Raymond James, reads things. When the president is elected on May 7, he says, "we will probably be thinking okay, it's over, so what? Local investors are a little bit too concerned with politics and daily news flow."
With the IMF likely to be kind to what Altug calls its Turkish "foster child" and Turkey's EU bid pretty much frozen for the year, most Turkish analysts agree with their international colleagues that the biggest market risk this year would be the election of a coalition government this November.
"Foreign investors own this market, and it works better that way," argues Mahmut Kaya of Garanti Invest. "Foreign investors are more rational. Locals are more concerned with perceptions."
Not everybody is quite so mordant about local pessimism. As Gunduz Findikcioglu, research director at TSKB, points out, some non-resident investors in the past put Turkey in the same basket as Poland. And "Turkey, emphatically, is not Poland."
Asked how accurate foreign investors' assessments of Turkish risk are, Ata Yatirim executive board member Mehmet Sami says he thinks they've got the macro-economic situation pretty much sussed out.
"What they lack, perhaps, is a feel for Turkey's volatility, speed of change, particularly in terms of political change", he says.
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