Borsa Istanbul trading suspended after index falls 7% on earthquake hit

Borsa Istanbul trading suspended after index falls 7% on earthquake hit
Turkey is essentially squeezed by the movements of tectonic plates. / Roxy, cc-by-sa 3.0
By bne IntelIiNews February 9, 2023

Earthquake fallout brought about a suspension of trading on Turkey’s stock market on February 8, with the BIST-100 benchmark index down 7.1% when the Borsa Istanbul exchange operator slammed on the brakes.

The drop extended a steep slide from the previous day triggered by the devastating earthquakes that hit southeastern Turkey and northern Syria. The  “circuit breaker” was twice tripped prior to the suspension.

The BIST-100 has slumped by 16% this week following the disaster.

Borsa Istanbul, the exchange operator, said trading would resume after five days.

Earthquake-wrecked building in Hatay (Credit: Hilmi Hacaloglu, VoA, public domain).

Bond trading continued. Turkey last year raised more than $9bn on international markets. In January, it issued a $2.75bn bond at a yield close to 10%. However, while bonds issued by other emerging markets have rallied in recent months, Turkey’s have stayed relatively subdued, according to Sergei Strigo, co-head of emerging market fixed income at Amundi, as cited by the Financial Times on February 8.

“Turkey has many vulnerabilities. Foreign exchange reserves are very low, which is affecting the performance of Turkish assets,” Strigo said. “Turkey does have market access and its debt-to-gross domestic product is still quite low, but borrowing costs are elevated and investors aren’t sure the central bank can bring inflation back under control,” he was further reported as saying.

Timothy Ash, senior emerging markets sovereign strategist at BlueBay Asset Management in London, put out some initial thoughts on what economic consequences Turkey might endure as a result of the earthquake crisis.

He said in a note to investors: “The seismic severity of the earthquake is equivalent, if not higher, to 1999 [when a 7.6-magnitude earthquake struck Izmit, east of Istanbul, killing around 18,000], and the human cost could be as big if not, unfortunately, bigger. The 1999 earthquake did though hit close to the economic heart of the country, covering an area which contributed something like 35% of national GDP.

“This time around the impact is in a poorer, less economically developed part of the country—I have seen analysis suggesting something like 10% of national GDP generated by impacted areas.”

Turkey’s GDP growth in 2023 would likely show some decrease as a result of the earthquakes but a rebuild and recovery spend from now to year-end would likely counter some of that decline, said Ash.

“In 1999 real GDP contracted by 3.3%, after 3% growth the year earlier and the earthquake hit in August, but the year after saw a sharp growth rebound to 6.9%. I guess the impact earlier in the year [of the earthquakes of this week] gives scope for more recovery rebound this year. The IMF WEO [World Economic Outlook] has a 3% growth assumption for this year, and my bias would be to think lower from that, but it’s finger in the air at this stage,” added Ash.

Ash added that Turkey’s inflation would likely move higher as shortages and supply disruptions weigh on an already difficult inflation outlook “caused by the unorthodox policy settings of the AKP administration”.

In the short term, he said, the balance of payments “likely will be buoyed by aid flows to support disaster relief and recovery. The AKP government/central bank have obviously been trying to defend the lira in the run-up to the May 14 elections, and their war chest of $125bn in FX reserves will now be augmented by these flows. The Erdogan administration will hope these new aid flows help assure the stability of the lira in the run-up to the elections, and provide an anchor to push inflation lower.”

In a remark on the geopolitical changes that might occur in the wake of the disaster, Ash said: “I think the assumption had been that if [President Recep Tayyip] Erdogan had been lagging in the polls he might look to exploit tensions with the usual suspects—Greece, the EU and West—to win votes in the May election—but as with 1999, the support coming from many countries, and particularly allies and regional players, might serve to improve relations/ease geopolitical tensions. So actually now risks of regional geopolitical blow-ups might be lower.”