ISTANBUL BLOG: Another rough day out of the office for finance minister Albayrak

ISTANBUL BLOG: Another rough day out of the office for finance minister Albayrak
A packed room greeted Albayrak as he took his widely disparaged economic PowerPoint show on tour. Dozens were left standing at the back. / @BeratAlbayrak
By Akin Nazli in Belgrade April 12, 2019

Let’s put this quite plainly. If you know you’re pissing in the wind, the advisable course of action is to stop. So why Turkish finance minister Berat Albayrak opted to once more present his underwhelming economic turnaround plan—this time to 400 investors packed into a hotel room in Washington—is anybody’s guess.

As bne IntelliNews reported after Albayrak first unveiled the plan on April 10 in a PowerPoint presentation in Ankara, the programme went down like a lead balloon with the audience, so just what would lead him to believe that it would be any different in front of a savvier crowd in the US is difficult to fathom.

“I don’t think he persuaded anybody, it did not go well… If it weren’t the case that the Fed and ECB currently present no risk to emerging markets, I would be a big seller of Turkey,” one investor—who emerged from the presentation venue where audience members were pondering just how long Ankara has to pull things around before the case for turning to the IMF becomes undeniable—told Reuters.

Another tough 24 hours
April 12 proved another tough 24 hours for Turkish assets, with the Turkish lira (TRY) pushed out to beyond 5.80 to the dollar in early afternoon trading before ending the day at 5.77, 0.54% weaker day on day and around 3% down on the week. Turkey’s 5-year credit default swaps (CDS) continued to rise, reaching 448 basis points on the day. The country’s dollar-denominated government bonds due for 2030-2038 repayment all fell as much as 1.2 cents, Tradeweb data showed.

Albayrak, mainly in Washington to attend upcoming G-20, World Bank and IMF meetings, also on April 12 met with Suma Chakrabati, head of the European Bank for Reconstruction and Development (EBRD). Turkey is the EBRD’s leading investment destination and the development bank lately pledged that it would provide more help to Turkish lenders struggling with growing non-performing loans (NPLs) amid recession and currency crisis-hit Turkey’s economic turmoil if requested.

Timothy Ash, senior emerging markets sovereign strategist at BlueBay Asset Management, pointed to how the debilitating row with the US over Ankara’s insistence that even as a Nato member it will go ahead and buy Russia’s S-400 advanced missile defence system, seen as a security threat to mightily expensive military hardware including the F-35 jet, is also an obstacle to Turkey finding its way out of the woods.

“Am in D.C. and mood on Turkey is sombre/worried in terms of relationship with the US,” Ash wrote on Twitter. “But seems resignation that S400s are delivered and Turkey is sanctioned… only hope is Erdogan-Trump personal ‘chemistry’ to pull back from brink.”

He added: “If I were Albayrak now, I would cancel all investor meetings in D.C., and focus on trying to sort S400 out and sit down with the IMF to figure out what the shape of a new IMF programme would look like. Don’t waste his time in D.C. on other stuff.”

Refinancing season progresses undeterred
Despite the new wave of turbulence to hit Turkey, it is notable that Global Capital reported on April 11 in a story entitled “Turkish reforms disappoint, but loans unfazed” that Turkish lenders’ loan refinancing season was progressing undeterred, even if Albayrak’s only numerical promise—providing a TRY28bn ($4.9bn) capital injection for the state banks—left bond investors less than over the moon.

Also on April 12, Moody’s Rating Services agreed in a research note that Albayrak’s economic reform program was light on content and details, and that Turkey’s economy remains beset by structural problems.

Moody’s expects Turkey’s budget deficit to come in at 3.3% of GDP in 2019 versus the government forecast of 2%. In his presentation, Albayrak kept to the government’s GDP growth and inflation forecasts of 2.3% and 15.9% for 2019, respectively, but Moody’s expects a 2% contraction in growth and headline inflation of 17%.

A lack of transparency around the Turkish banking industry’s NPL ratio remained a concern and the risk in Turkish banking assets continued to worsen, the rating agency also said.

Looking at the latest weakening trend dragging down the lira, Ash tweeted: “If experience of 2018 is anything to go by, CBRT [Turkish central bank] needs to get ahead of curve by hiking policy rates. Need Istanbul election [decision on whether to accept the validity of the opposition win] and S400 resolution and/or IMF assistance.”

Growth/lira trade-off
“The dilemma facing Turkey is a trade-off between growth & Lira stability. The Q1 credit expansion boosted GDP, but at the cost of a wider current account deficit, which destabilized the Lira. Short term the only solution is accept slower growth. Medium term it's to reform,” Robin Brooks of the Institute of International Finance (IIF) wrote on Twitter.

“The Turkish finance minister’s economic reform plan unveiled this week was light on details and provided worrying signs that the government may lean on state banks to drive an economic recovery,” William Jackson of Capital Economics said in a research note headlined “An interventionist streak”.

He added: “As things stand, state banks’ aggregate total capital adequacy ratio of 14.9% is much higher than the regulatory minimum of 8% (and the capital ratio would rise to almost 18% of risk-weighted assets after the capital injection). It may be that nonperforming loans are actually higher (and capital positions weaker) than recorded, or that some state banks have much weaker balance sheets than others.”

Jackson also noted: “More fundamentally, it’s unclear what Mr. Albayrak could really do to reassure investors so long as President Erdogan (his father-in-law) continues to take a more unorthodox approach to economic policy. For our part, we’ll pay more attention to the economic data and the central bank’s actions to judge whether there is a shift in policymaking.”

Jackson went on to voice his concerns over Albayrak’s fuzzy reform package, given his past experience of the Erdogan administration, writing: “However, the capital injection could also allow state banks to expand their balance sheets and loosen credit conditions. These banks were already under pressure to boost lending ahead of March’s local elections. This seems to have helped the economy to stabilise.

“But it has also come alongside a modest widening of the trade and current account deficit. In this context, it’s worth bearing in mind that the government’s credit guarantee fund [KGF]–launched after the coup attempt in 2016–supported a sharp rise in bank lending and also contributed to the widening current account deficit that triggered last year’s crisis.”

Bare cupboard
In another reflection on how Albayrak’s reform plan pretty much amounts to a bare cupboard given the scale of the economic morass Turkey finds itself in, one investor told Reuters that at the Washington hotel event the finance minister pointed to a recent dip in inflation and an improving current account balance to argue that Turkey was doing much better today than it was last October, when it was emerging from its major currency crisis. Unorthodox (or just plain nutty?) Erdonomics might blithely contend that the Turkish economy is doing “much better”—after all look at how Erdogan was prepared early last year to go to London and declare to all and sundry (including Bloomberg Television) that, yes, high interest rates drive up inflation and, yes, as president he should be a dominant voice in steering monetary policy—but a Washington audience of Wall Street-wise investors just ain’t gonna run with that. It’s no wonder that by all accounts Turkish central bank governor Murat Cetinkaya, who appeared at the hour-long presentation alongside Albayrak, said little. Who can blame him?

Still, analysts say Albayrak and his strongman father-in-law could pluck victory from the jaws of economic defeat if they quickly get real, though the window of opportunity for such a turn on a sixpence will soon be shut.

Palpable uncertainty
There’s still palpable uncertainty as to where things go from here. For instance, the median of a Reuters poll of 43 economists on April 12 gave an estimate that Turkish GDP will contract 0.3% y/y in 2019, with the range of forecasts ranging from growth of 2.3% to a contraction of 5.0%. Turkey’s GDP is expected to contract 3.4% and 1.2% in the first two quarters of 2019, respectively, before returning to growth of about 2.1% in Q3, according to the poll’s median.

The Turkish statistical institute TUIK will announce the official Q1 GDP data on May 31.

The Reuters poll participants’ median inflation forecast was for 17.5% at end-Q2 and 15.5% at end-2019. Expectations for the current account deficit in 2019 stood at 2.4% of GDP.

When asked whether Turkey will seek funding from the IMF or another outside institution, six respondents said No. Also, Turkey was not expected to hold early presidential and parliamentary elections ahead of the scheduled date of 2023, according to five respondents.

One analyst holding out for a soft landing scenario is Muammer Komurcuoglu of Is Investment. He said: “We expect the economy to return to the positive growth zone in the second half of the year. Yet, this recovery is fragile and depends on political and geopolitical developments.”

Of the analysts with no real faith in the Turkish lira, one is Guillaume Tresca of Credit Agricole who told Reuters: “It’s not a real don’t take the risk on TRY, or if you do it is just for one, two or maybe three days.”

And just who was it that was hosting Mr Albayrak?
Finally, let’s take one more look at that hotel presentation and ask ourselves, just who was it who was hosting Mr Albayrak at this guest-only event. If you saw any sign of squirming from Albayrak that may have been because the answer is JPMorgan Chase & Co. That’s right, JPMorgan, the very investment bank that, in the week before Turkey’s March 31 local polls, became a target of Erdogan for issuing a March 22 research note advising investors to short the lira based on its observation of unsustainable FX reserves.

On March 23, Turkish banking watchdog BDDK initiated investigations into JPMorgan as well as other unspecified banks for allegedly exploiting and aggravating the biggest plunge in the Turkish lira (TRY) seen since last summer’s currency crash. The BDDK accused the two JPMorgan analysts behind the note of putting out “misguiding and manipulative” advice.

Subsequently, on March 24, Erdogan warned bankers during an election rally that there would be “a heavy price” to pay after the elections were over.

“If you are soaking up foreign currencies from the market and engaging in provocative actions, there will be a heavy price for that… Now, the banking regulator took some steps, but you should know that, we will make you pay a heavy price for that after the elections and all the work is being conducted by the Treasury and Finance Ministry,” Erdogan said.

“I am calling on those who are engaging in such activities ahead of the elections. We know the identities of all of you. We know what you are doing… You would not be able to exploit this nation. You would not be able to cheat this nation… We will protect our money. Our money is the Turkish lira. We will protect it. We will not rise to the bait. And we will make them pay the price,” he added.

On March 27, after the Erdogan administration attempted to dry up almost all offshore lira liquidity on the London swap market to frustrate the shorts, pro-Erdogan daily Hurriyet quoted an unnamed banker as saying that some lenders that attempted to short the lira the previous week—including Citibank, JPMorgan and Deutsche Bank—could not have closed their short positions and might be temporarily or even permanently banned from the payments system.

Yet less than a month later, there was Albayrak up on stage in Washington at an event hosted by JPMorgan, underlining once more to those expecting long-term economic reforms from the Turkish government just how long its attention span actually is.