Turkish markets continued to rally on January 24. The Turkish lira got below 5.25 to the dollar while the benchmark BIST-100 Istanbul stock exchange index passed 101,000, with the banking index testing 135,000 for the first time since July.

The 2-year benchmark domestic bond yield provided another indicator of the comeback, falling to around 17%, the lowest figure seen since June. The benchmark yield on the 10-year domestic bond gained to around 15.2%. It’s the best level seen in seven months.

Analysts are finding it hard to fathom the very early spring seen in the Turkish markets. It’s not as if the government has announced a rigorous plan to solve the currency crisis-hit country’s liquidity shortages, double-digit inflation and severe recession (a recession that is already here, is set to begin or, if Turkish finance minister Berat Albayrak’s latest “soft landing” pronouncements at Davos are to be believed, might not occur at all).

Bank earnings season
“Akbank and Garanti Bank to kick off the 4Q18 earnings season for Turkish banks on January 31. Following a 19.9% q/q decline in net earnings in 3Q18, we foresee a further 17.1% q/q net income drop for the Turkish banks in our coverage for 4Q18. This would also mean a 13.8% fall in profits y/y,” Sevgi Onur of Seker Invest said on January 23 in a 4Q18 Banks Earnings Preview.

Seker Invest was reckoning with a negative impact on Akbank and Garanti Bankasi shares from the release of their Q4 financials.

“#Turkey's benchmark stock index soared 7.4% last week, on biggest foreign net purchases since 2013… #XU100 is the 2nd top performing index in 2019,” Fercan Yalinkilic of Bloomberg said on January 24 on Twitter, adding in another tweet: “#Turkey's non-performing loans reach nearly 100 billion liras ($19bn). Monster debt restructurings sought or completed by large companies reach $24bn,” he added, citing a Bloomberg article entitled “Turkish Banks Face More Restructuring Woes as Bad Loans Soar.”

Scooping up battered shares
After a rather awful 2018, Turkish stocks are enjoying their strongest start to a new year since 2013. Investors are scooping up battered shares amid easing concerns over political risks, according to a January 23 Bloomberg story.

Non-residents’ net share purchases on the Borsa Istanbul amounted to $827mn between January 4 and January 18, the central bank said on January 24 in its regular weekly data release. In the week that ended on January 11, foreigners’ net Turkish equity purchases amounted to $115mn. That figure was succeeded by $712mn in the week that ended on January 18.

Meanwhile, foreigners’ net domestic government bonds sales have amounted to an outflow of $264mn since the beginning of the year.

Net portfolio outflows from the Borsa Istanbul amounted to $960mn in 2018 versus an inflow of $3.55bn in 2017, while net outflows from domestic government bonds stood at $1.06bn last year versus the strong inflow of $7.17bn the year before.

“We can use data from EM international investment positions to estimate the returns foreign investors earned during last year's EM sell-off on their stock and bond holdings. In US$ terms, the worst performer is Argentina (-40%), [then] Turkey (-29%) and then South Africa (-24%),” Robin Brooks of the International Institute of Finance (IIF) said on January 24 in a tweet.

The latest phase of the Turkish lira (TRY) recovery, observed since the central bank held rates constant on January 16, continued on January 24 with the support of positive sentiment towards emerging markets and finance minister Albayrak’s emphasis on fiscal discipline in Davos.

Albayrak’s upbeat appearances at the World Economic Forum 2019 in the Alpine retreat continued on January 24 with a Bloomberg TV interview.

“Man in the cockpit”
“The man in the cockpit of the Turkish economy is preparing it for a ‘soft landing’ after bouts of severe currency turbulence,” was the billing from the channel leading to a face to face with the minister, who also happens to be the son-in-law of Turkey’s strongman president, Recep Tayyip Erdogan.

Albayrak, taken as a mere government communications grandstander by many of his critics back home, generally impressed the international press corps gathered in Davos with his fluent English and ‘just what the physician ordered’ messages of fiscal rectitude.

Meanwhile, also on January 24, Albayrak held a press meeting with Turkish journalists broadcast live on Turkish television channels from the annual meeting of the global political and business elites. The assembled hacks quizzed him on unpaid VAT returns.

Turkish real sector companies, hit by a severe liquidity and credit crunch, have been chasing the Erdogan administration for the returns since the start of 2018. Turkish media reports suggested through the end of last year that Albayrak was planning to pay less than half (equivalent to TRY65-70bn) of the unpaid VAT returns valued at around TRY150bn.

President Erdogan talked of how the “VAT returns could be paid” at a meeting held on January 21 with members of the Turkish Union of Chambers and Commodity Exchanges (TOBB), Hacer Boyacioglu of daily Hurriyet reported on January 23.

“The VAT returns are not a simple issue,” Albayrak told the Turkish journalists in Davos, adding: “A serious study regarding the figure is required. We can take a step within economic realities.”

Albayrak, who taught banking and finance at Marmara University in Istanbul according to the Turkish Treasury’s revamped website, has the unenviable task of struggling to solve the economic turmoil (at what point do we call it an economic crisis? Plenty of the savvy had the answer to that question months ago) of a credit-fuelled country that is home to 81mn people. His choices are limited by his father-in-law, who according to his administration graduated from Marmara University's Economic and Commercial Sciences Faculty in 1981, though there must be some kind of mix-up here as that’s one year before the faculty was formed.

That McKinsey moment
On September 28, Albayrak revealed that the Turkish government had decided to work with the “blue-blooded” US consultancy firm McKinsey during a talk show event held at the 9th Turkey Investment Conference organised by the Turkey-U.S. Business Council (TAIK) in New York.

The McKinsey revelation quickly brought a querulous reaction from Erdogan’s supporters who had been convinced that they were fighting an economic war against the US.

“I’ve told our ministers that no advisory services [from abroad] should be received,” Erdogan responded, rebuffing his son-in-law in a televised speech at an AKP party meeting on October 7. Albayrak listened to the speech while the TV cameras were focused on him. “There’s no such need. We are enough for ourselves,” Erdogan also told his audience.

Turkey was on the hook with obligations to repay a total of $174.5bn in foreign debt within one year as of end-November, up from $173.8bn at end-October, due to rising public debt, the central bank said on January 17.

As of the end of November, Turkish public lenders were obliged to pay a total of $28bn in foreign-debt within a one-year period, while private lenders were obliged to pay $64bn and non-financial private companies were obliged to redeem $65.5bn.

Uncomfortable message
“I’m looking around to see whether there are any of the McKinseys and Boston Consulting Groups, and if there are please listen to me,” IMF head Christine Lagarde told those in the room as she delivered an uncomfortable message about the work of such consultants at a meeting held on January 23 in Davos, Tom Belger of Yahoo Finance reported.

“I see many, many low-income countries and emerging-market economies spend millions of dollars commissioning consultants to build their strategy plan. I would recommend some saving be made by taking the 17 principles, the actionable items, and start with that… From there, the consultants can actually do their job of putting it into reality. But don’t reinvent it—it’s right there. So much is wasted. That’s part of the inefficient spending that can actually be saved,” Lagarde added.

Since Erdogan has not yet allowed him to approach the IMF, Albayrak betting on eurobond sales despite expensive costs, motoring past some pungent warnings.

The Turkish finance ministry said on January 24 in a written statement that it has mandated BNP Paribas, Deutsche Bank and JP Morgan for the issuance of a euro-denominated bond due 2025 as part of the 2019 external borrowing program.

Initial price guidance on Turkey’s new euro-denominated bond yield was set at about 5%, unnamed banking sources told Reuters on January 24.

Koc goes for a bond
Koc Holding, one of Turkey’s largest conglomerates, has, meanwhile, applied to the banks for an international bond issue, Reuters reported on January 24. Koc’s last international bond issuance saw the sale of $750mn worth of 2023 bonds at a yield to investor of 5.40%, it added.

More international financial markets news shows the government’s attempts to encourage public and private lenders to tap the markets with asset-backed bonds bearing their first fruit.

Vakifbank has issued TRY396mn worth of 8-year mortgage covered bonds abroad, the public lender said on January 22 in a bourse filing, adding that total international funds obtained simultaneously reached TRY550mn together with the swaps under Treasury transactions.

Vakifbank did not provide any details as to who bought the paper or at what cost.