ISTANBUL BLOG: No end to the jitters for Turkish markets

ISTANBUL BLOG: No end to the jitters for Turkish markets
By Akin Nazli in Belgrade May 3, 2021

Overall portfolio outflows from Turkey— including equities, domestic bonds, eurobonds and swaps—amounted to $1.54bn in the week ending April 22, following slight inflows recorded in the previous two weeks.

The country has found itself unsettled by another period of economic disquiet, with renewed trepidation as to what could be around the corner, since the shock firing of market friendly central bank governor Naci Agbal by presidential decree on March 19.

On the Borsa Istanbul and lira markets, there remains little liquidity, making Turkish assets vulnerable to shocks.

Why the local stock market is not collapsing remains a mystery. The foreign investors are selling. And company owners are siphoning the market with initial public offerings (IPO) and rights issues.

Yet outbreaks of turbulence on the Istanbul stock exchange—as mentioned by bne IntelliNews on numerous occasions in the past couple of years—are forestalled by an ‘invisible hand’ that keeps a grip on some of the stocks that make up the biggest weights in the benchmark indices.

On April 20, Garanti BBVA redeemed $500mn of eurobonds (seen in the chart above). On April 29, Ziraat Bank also redeemed $500mn of eurobonds (this move will be added to the chart when the central bank data for the week ending April 30 is published at 14:30 local time on May 6).

On May 4, Vakifbank will redeem a paper worth €500mn and, on May 18, the Industrial Development Bank of Turkey (TSKB) will redeem a $300mn paper.

On the other hand, on April 30, Istanbul-based low-cost carrier Pegasus Airlines completed the sale of $375mn of 5-year eurobonds, callable in the third and fourth years. They are the first eurobonds sold by a Turkish borrower since January.

The airline did not state when it will receive the proceedings.

It also did not provide information on the cost of the paper in its stock exchange filing but Reuters reported that the eurobonds were supposed to pay a 9.25%-coupon.

It is hard to fathom, but the company is slated to pay a total coupon of 46% if it cannot recall the paper in the third year.

On April 28, Pegasus CEO Mehmet Nane reiterated that the coronavirus crisis-hit Turkish aviation industry roughly needs $2bn and noted that its borrowing costs were high due to Turkey’s high risk premium.

Nevertheless, Turkey still has access to borrowing on the markets—though each instance of borrowing at these costs brings the country closer to the ultimate end, namely and economic and political surrender to an IMF programme.

On April 27, Global Capital reported that auto supplier Standard Profil, a company with production sites in Turkey, was also in the market, looking to sell a €275mn, 5-year paper. However, the company is headquartered in Germany. It is not known whether the paper will reflect in Turkey’s balance of payments (BoP).

The BoP remains under close scrutiny. Turkey’s data reliability is subject to widespread scepticism, and the BoP data is no exception. And, it is lagged.

However, it provides a basis for following up on more reliable data such as the foreign trade figures based on the special trade system (which excludes the re-exports of the country’s free-trade zones) provided by the trade ministry.

In the first week of May, the trade ministry will release the data for April.

For Turkey’s tourism income under the services balance, national statistical agency TUIK releases some figures, but the number of foreign tourists as provided by the culture and tourism ministry is a more reliable indicator.

Under the financial account, a positive aspect of the dried-up foreign direct investment (FDI) inflows is that it is possible to track this account via home sales made to foreigners.

Home sales to foreigners.

Also under the financial account, in addition to the portfolio flows above, we can watch loan renewals. External debt rollovers have continued undeterred.

The April syndicated loan renewals of the lenders Akbank (AKBNK), Ziraat and Vakifbank (VAKBN) suggested fresh inflows, albeit too little compared to what Turkey would like to see. The rollovers of Finansbank (QNBFN), Yapi Kredi (YKBNK), Garanti (GARAN), Isbank (ISCTR) and Turk Eximbank are awaited.

The central bank officially has around $90bn of gross FX and gold reserves, but its net FX position remains in deep negative territory at around minus $60bn. The banking industry has an additional $20-30bn.

It is hard to track how much usable immunity the government has. However, prior to November 6, it had almost nothing at hand with which to restrain the weakening of the USD/TRY pair. The rate was slowly (suggesting there was still some control left) going north.

From November to March 19, after the market bought the Erdogan administration’s line that it was bowing to hawkish monetary policy, around $25bn arrived in portfolio inflows. Since March 19 and the exit of Agbal, around $13bn has flowed back. Around $12bn or a bit more thus remains, but some leakages (such as in the current account deficit) exist.

The flow of lira loans to the economy is also under close scrutiny. So far this year, it has not reached anything like the eye-popping levels seen in 2020, and local FX and gold demand does not seem to have taken off either.


On April 29, the central bank hiked its end-2021 inflation forecast to 12.2% from the previous 9.4%. Also, the upper limit on official inflation was moved up to 14.4%, closer to market expectations.

The new central bank governor Sahap Kavcioglu reiterated a few times that inflation would peak at around 17% in April before easing. Analysts noted that he read from a text when replying to questions. The finance industry speculated that the questions were selected before the meeting. When it comes to the Turkish central bank’s credibility, there’s nothing left to discuss.

The official inflation rate for April will be released on May 3.

On May 6, the next rate-setting meeting will be held. It is assumed that the policy rate will be kept at 19%.

On June 3, the May inflation rate will be released and, in line with the central bank’s analysis at least, it is supposed to bring a decline.

The thinking is that at the June 17 rates meeting, the policy rate will again be held constant, with a cut set to follow at the July 14 meeting after the June inflation release on July 5 confirms a declining trend in price growth.

However, by then, Turkey may be dealing with the impacts of another currency shock—will the government continue to insist that inflation is falling?

In the sixth week after the sacking of Agbal, the bottom for the USD/TRY pair appeared to be rising to 8.20.

When it is heading to 8.50, the “retail” accounts start selling their FX heavily, but the best that could be achieved is probably in the 8.15s. Who out there is questioning how these “retail” accounts act in such perfect harmony? We’re waiting.

The latest movement in the USD/TRY band was partially caused by a limited strengthening of the dollar. The Fed’s balance sheet edged down to $7.78 trillion on April 27 from the record $7.82 trillion seen on April 20.

Given that a sharp reversal in the money printing is not expected soon, “Sell in May, go holiday” is seen as the next possible time for a market shake-up.

The Biden administration’s new stimulus packages and tax hike plans are also under scrutiny.

The pandemic in Turkey remains a true tragicomedy. President Recep Tayyp Erdogan has brought in what he says is a “full lockdown”, but it is hard to describe it even as a partial lockdown, given the great number of exceptions allowing people to circulate.

Nevertheless, the officials are insisting to anyone who will listen that the infection rate is in free fall. The plan, you see, is to open up to tourists in June.

Social dismay is growing.

On April 24, US President Joe Biden caused some surprise by doing what predecessors including Barack Obama backed away from, namely, formally calling the WWI-era Armenian Genocide by its name.

However, the move was delivered with some subtlety, not in a fashion that would necessarily blow up the available bridges between Biden and Erdogan. (The Biden administration appears to be making a specialty of this kind of two-sided move. For instance, Biden announced sanctions that applied to Russian government paper, as reflected in some media reports, but at the same time the US finance industry loaded up on the paper since the sanctions were only applied to the primary market; the secondary market was left open to benefit from the hit on prices caused by the sanctions talk.)

Biden finally deigned to call Erdogan on April 23. The “autocrat”, as Biden has described him, had been waiting for a call since Biden entered the Oval Office in January.

The press was informed that it was agreed that Biden and Erdogan will meet on the sidelines of a Nato summit to be held on June 14 in Brussels.

Then, it was “leaked” that during the call Biden confirmed to Erdogan that the “G-word” would be at the heart of a statement to be released by the US leader on April 24.

There are still few clues as to what the Biden administration is planning for Erdogan or Turkey  and the wider region. Biden “is simply aware that for the first time in many years, Erdogan needs the U.S. more than Washington needs him... using this window as a lever, hoping to correct some of Erdogan’s behavior,” according to Washington-based Turkey analyst and historian Soner Cagaptay.

One could reason so, but the arguments here seem a little bit naïve. Cagaptay thinks Biden has an eye on reeling Erdogan in on “human rights” and on his closeness to Vladimir Putin, with the S-400 missiles Ankara bought from the Kremlin something Washington wants taken out of the picture. But if Erdogan takes any step back from his “anti-democratic actions”, it will bring about the end of his regime. So, for Erdogan, these matters are off the table, unless he can get away with some mere cosmetic moves.

“The crux of the issue now isn’t that Biden is mad at Erdogan, but rather that almost the entire U.S. government is,” according to Cagaptay.

Well, given that Biden has now won some acclaim for a big move on “human rights” in, after more than 100 years, introducing US recognition of the Armenian Genocide, he may find himself with a free hand to do some business with Erdogan.

The genocide recognition operation as a whole, which started with the very deliberate omission in not calling Erdogan for three months, and ended with such clean wording in the declaration, was professional, balanced, well-planned and well-executed, suggesting that the Biden administration is not a bunch of fools. But, while the White House wants to bring Erdogan as low as possible ahead of pushing him to do its bidding, Erdogan will nevertheless run rings around Biden and his team before digging his claws in when it comes to agreeing some “transactional” partnerships.

Given the June 14 appointment, April 24 will drop away like a non-event.

It would be possible now to write reams on who wants what, but it’s better to watch for tangible moves. At the end of the day, Erdogan is only focused on his own survival (in Turkey, a prison cell might well beckon very soon should he find himself out of office) and he will have trepidations about the upcoming Halkbank case (the Turkish state bank has been indicted in New York for Iran sanctions busting and money laundering and who knew what in the Erdogan administration is an intriguing question).

Biden has so far dabbled in making the Kremlin feel some heat, but he is now meant to attend to his real task, which is China. Erdogan may be encouraged by noises in the Western media that he will be subcontracted by the US for matters in the Central Asia, but he can’t dispense with Kremlin consent (e.g., “conquering” Nagorno-Karabakh with drones but stepping back when it came to Donbas). What he could feasibly manage with Central Asia, apart from deploying jihadists, is questionable.

The genocide recognition will have no lasting political or economic impact. It amounted to an uncomfortable day or two for Erdogan, that’s all.

It’s not as if genocide denial was his doing. It was in fact among the main fundaments of the coalition that founded the Republic of Turkey in the early 1920s (and there’s not much left of that nowadays given Erdogan’s handiwork).

If we want to get to an ultimate question, we should seek to identify who presently holds the Armenians’ historical real estate assets and work out from whom they bought those assets. A frank and honest inquiry here would lay the basis for a healthier society in Turkey, but this question is a dangerous one for Turkish speakers. It could end with a few bullets in the neck.

So to be realistic, expect the coalition of the genocide deniers to stay dominant in the construction of any post-Erdogan Turkey. A new version of the ruling party, Erdogan’s Justice and Development Party (AKP), working under an IMF programme is the likeliest potential major change you might see on the road ahead. The genocide deniers will then recover some ground in international politics.