ISTANBUL BLOG: Turkey mired in ‘death of democracy’ outrage—but global lenders are unfazed

ISTANBUL BLOG: Turkey mired in ‘death of democracy’ outrage—but global lenders are unfazed
Although foreign bankers show their commitment to Turkish lenders, Turkey’s banks have been net debt payers since November 2014.
By Akin Nazli in Belgrade May 9, 2019

Turkish banks have retained the support of international lenders despite President Recep Tayyip Erdogan dealing a grievous blow to the state of democracy in Turkey by backing a re-run of the Istanbul election lost by his party.

The scenario was relayed by Global Capital on May 8 with an article entitled “Foreign lenders committed to Turkish banks despite Istanbul re-run”.

The authoritarian president’s latest casting off of any democratic pretensions did not dent international lenders’ appetite for financing Turkey’s banks, market participants told the news outlet.

The latest bout of depreciation hitting the Turkish lira (TRY) and growing pressure from fixed income investors for huge policy rate hikes, appear to have had a minimal impact on the taste of international lenders for Turkey’s debt as they continue to plough money into Turkish borrowers.

Destiny of the NPLs
On May 9, unnamed sources told Reuters that Turkish banks and international investors, including Goldman Sachs, Bain Capital, the European Bank for Reconstruction and Development (EBRD), the International Finance Corporation (IFC) of the World Bank Group and the International Bank for Reconstruction and Development (IBRD), would come together in a closed-door meeting organised by PwC to discuss the destiny of the already huge and still growing non-performing loans (NPLs) portfolio of Turkey’s lenders.

Foreign-held lenders account for around a quarter of the Turkish banking industry’s total assets.

Erdogan needs to soon recognise that “once lost, investor confidence is difficult to restore”, Desmond Lachman wrote on May 8 in an op-ed entitled “Turkey demonstrates how to bungle a currency crisis” for The Hill. He added that making that realisation “might induce him to do something radical like call in the International Monetary Fund for help or fire his minister of finance to show that he has become serious about breaking the downward economic spiral. If he does not do that the rest of the emerging market economies and the Spanish banking system should brace themselves for economic shock waves coming from a Turkish debt default.”

Spain’s BBVA bank has the highest exposure to the Turkish banking industry among foreign lenders as it holds 49.85% of Turkey’s largest private lender, Garanti. BBVA Research has remained extremely optimistic over Turkey’s economic and monetary policy outlook, while its chief economist Alvaro Ortiz gets an A for his effort on Twitter to convince popular commentators on Turkey that the country’s inflation will fall and GDP won’t contract at the same time.

ING Bank has a relatively lower exposure to Turkey compared to BBVA and its research team simply moves along with any possible market friendly comments or developments in a more non-committal way.

Italian lender UniCredit has exposure to Yapi Kredi Bank, one of the largest private lenders in Turkey.

According to a survey released on April 30 by the Loan Market Association (LMA), foreign lenders see the most opportunities for syndicated lending in Turkey when it comes to CEE and CIS countries this year. Some 28.6% of LMA members saw Turkey as offering the most opportunities, followed by Poland with 27.4% and Russia with 23.8%.

“There isn’t a lot of [domestic] lending so the banks don’t have huge funding needs. Generally, we’re seeing smaller rollovers, but there’s no indication that the market won’t be happy to lend to them. The banks are still reasonably well capitalised,” Arvid Tuerkner, managing director for Turkey at the EBRD, told Global Capital.

Progress undone”
The Institute of International Finance (IIF) on May 6 observed its EM Growth Tracker that “the recent credit expansion in Turkey has undone a lot of progress made last year in reducing the current account deficit and external vulnerability,”.

On May 8, the EBRD said in a press release that it has bought a $100mn stake in Ictas Surdurulebilir Enerji Yatirimlari, the renewables arm of Turkey’s IC Energy Holding.

Ictas operates 10 hydropower plants with a total capacity of 400 MW. With EBRD funds, it plans to invest in wind farms and solar projects with a combined capacity of up to 250MW. The EBRD investment will also partly finance the recent privatisation of the Kadincik hydropower plants in Mersin.

The development bank is a leading institutional investor in Turkey. It has invested over €11bn in 283 projects in the Middle East’s largest economy since 2009.

Of course, the crimes against humanity committed by the Erdogan regime since 2009 would be too numerous to list here. Such is the reality.

Too big to walk away from”
“It’s not ideal—no one wants to see another political back and forth in an already troubled market. But [Turkey’s] banks will still be able to continue their international refinancings. If things continue to be rocky, maybe margins will widen again, but the [lender ­ borrower] relationships and ancillary business that Turkish banks guarantee are too big to walk away from,” an unnamed loans banker at a European firm told Global Capital.

“Turkey has shown some recovery since last summer’s crisis. The Turkish banks repriced their semi-annual borrowings—they’re not back to the previous levels but there is some recovery as deal volumes remain strong,” Penelope Smith of Commerzbank remarked to the publication.

International lenders also demonstrated their teflon commitment to Turkish banks during the currency crisis last August. Within a month of the catastrophe, Turkish banks re­entered the syndicated loans market, refinancing billions of dollars of outstanding debt with such lenders. Although borrowers, including Turkey’s largest bank, public lender Ziraat Bank, received margins that were 25bp wider, all the major bank loans were oversubscribed, demonstrating continued strong international demand for Turkish debt.

Despite new waves of turbulence now hitting Turkey, the Turkish lenders’ spring loan refinancing season that takes in April and May is progressing undeterred.

High levels of demand for Turkish bank loans in the secondary trading market are testament to the resilience of the banking system, despite the monetary and economic crisis playing out in Turkey.

“Secondary trading in such issues initially stopped altogether, but after a few weeks it restarted. Trading of Turkish assets is one of the busiest sectors in the secondary trading market,” Smith added.

“Daily figures on foreigners’ purchases of EM stocks and bonds, published by a handful of countries, suggest that inflows weakened in late April. That coincided with fresh currency strains in Turkey and Argentina (and a modest weakening of most other EM currencies),” William Jackson of Capital Economics said on May 8 in the economic research company’s Emerging Markets Capital Flows Monitor for April.

Why such a big thing?”
“Kind of interesting that pro [ruling party] AKP types are defending the decision to re-run Istanbul elections by asking the question why markets are making such a big thing of this—as plenty of investors invest in many authoritarian regimes—from Saudi Arabia to Egypt, and to Russia, China et al. They suggest that the coverage is hardly fair, and that some kind of foreign plot has been hatched to take the AKP down through the economy—and financial market participants are somehow involved. They are right in so far as while we all try and deploy ESG [Environmental, Social and Governance] criteria now in investment decisions, the reality is that many regimes which are far from democracies still present strong investment themes/cases. And as long as investment in these economies is not sanctioned, or illegal, or ethically beyond the pale, then investors are still willing to put money to work,” Timothy Ash of BlueBay Asset Management said on May 7 in a note to investors.

A critic assessing the AKP figures Ash is talking about might observe that they hardly have a crumb of any kind of ethical or humanistic value. They are only interested in the cash on offer. But the world turns another 360 degrees and the credit and investment stories must move on.

Ash elaborates on the “ethical” standards of investors: “But what is making it increasingly difficult to invest in Turkey—as opposed to the likes of Saudi, Egypt, Russia, China, etc—is the fact that in terms of macro economic policy at least, all the four latter countries operate pretty orthodox policy. Importantly, while you may have issues with the policy of these countries in other areas (democracy, human rights, social policy), their leadership tend to hire top quality technocrats to run macro policy, and then delegate.

“From macro policy these other economies are meritocracies—Putin hires the best staff for the CBR [Central Bank of Russia] and the MOF [Ministry of Finance], and technocrats are generally given the freedom to run policy. Putin listens to their best advice, and nine times out of ten goes with their advice. I am afraid in Turkey these days, loyalty to the regime comes first, over technical qualifications for the job. And whoever is hired into key positions, it’s the willingness to toe the party line, rather than pursue the correct policy choice which is the dominant factor. This means that confidence/policy credibility is at a really low point/ebb in Turkey at this point in time, and that Turkey scores badly still via much more authoritarian regimes.”

Wanted: bold hike, bold devaluation
Analysts who backed the Erdogan regime’s efforts to pull the country out of its financial funk even as late as March before the outbreak of the latest lira and other intractable woes need a bold rate hike following a bold currency devaluation to restore their factory settings, while equity investors also await the indispensable devaluation to jump into well-established Borsa Istanbul companies currently trading very much lower than their peers in other countries with those bothersome human rights issues.

On May 9, the Turkish central bank said in a press release on “Turkish Lira Liquidity Management”: “Considering the developments in financial markets, it has been decided to suspend the one-week repo auctions for a period of time.”

The move came after the lira hit 6.25 against USD, its weakest level in eight months. The currency retreated to the 6.22s following the announcement.

“What Turkey needs now again is a more compelling and more permanent hike in policy rates,” Ash said in a note to investors following the central bank move.

Outlier confident Erdogan is learning
Also on May 9, Thomas Clarke of William Blair International stepped forward as an outlier, showing what some might see as an incomprehensible confidence in Erdogan’s learning ability and the markets’ ability to intimidate the hardheaded strongman.

“I think he has learned his lesson from the crash. The currency market can intimidate even Recep Tayyip Erdogan… That is a kind of a safety net that I think prevents Turkish policy from being thoroughly compromised, which would be very dangerous and would probably result in a one-way [route] for the lira downwards,” he told Bloomberg.

Clarke has invested in the world’s worst-performing currency this quarter, but he’s not worried, and, in fact, he’s reportedly tempted to buy more.

This glimmer of bullish sentiment comes with the lira having shed another 10% of its value since March—more than any other currency in the world tracked by Bloomberg.

The scenario has prompted swap traders to position for another interest-rate hike, the news agency noted, while relaying how data from the Tokyo Financial Exchange last month showed Japanese retail investors holding the biggest long positions in the lira versus the yen since early August.