Locals wonder if surprise S&P upgrade is in store for Turkey

Locals wonder if surprise S&P upgrade is in store for Turkey
By Akin Nazli in Belgrade February 12, 2019

Turkish markets are focused on Standard & Poor’s’ next scheduled rating review expected to be released on February 15 after the markets close. The S&P review will be the first issued on Turkey in 2019 to date. Fitch Ratings has pencilled in May 3 for its release.

“No change is anticipated in [S&P’s] credit rating and outlook,” Isbank Research said on February 11 in its weekly bulletin.

However, locals, who are trying to pinpoint just why it is that Turkish markets have experienced an ‘early spring’ since the start of the year, are discussing whether S&P might surprise with an outlook upgrade.

Fitch rates Turkey at BB/Negative together with Guatemala and Vietnam. Moody’s Rating Services rates Turkey at Ba3/Negative together with Bangladesh, Bolivia and Vietnam while S&P rates Turkey at B+/Stable together with Kenya and Greece.

Fitch will watch Ankara’s policy response to Turkey’s weaker growth outlook and examine whether the relative strength of the country’s public finances can be maintained, the global head of sovereign and supranational ratings at the agency said on January 28.

Awaiting BoP, industrial data
Local markets are also waiting on balance of payments (BoP) and industrial production data for December, set to be released on February 14.

A Reuters survey showed that seasonally-adjusted industrial production is expected to have contracted by 7.5% y/y in December while an Anadolu Agency survey put the expectation at minus 6.8%.

On February 15, the unemployment rate for November, retail sales data for December, central government budget realisations for January and the central bank’s latest expectations survey will also be on the markets’ radar.

Together with this week’s data releases, the initial data set for Q4’s GDP growth will be completed. The Q4 growth data will be announced on March 11.

On March 6, the monetary policy committee (MPC) will hold its final meeting before the March 31 local polls.

Worse-than-expected initial data for Q4 growth might help the MPC justify an earlier rate cut than market players want to see as Turkey pursues an economic recovery.

Turkish President Recep Tayyip Erdogan’s election campaign, which has lately hit Borsa Istanbul-listed lenders but is not currently sending any brickbats the way of his Western allies, and his visit to Russian counterpart Vladimir Putin on February 14 are also on the market’s agenda.

Erdogan has been upping the rhetoric against enemies such as Kurdish separatists but Turks do not yet sense that they are facing any kind of urgent security threat. Thus, they have not yet been distracted from Turkey’s severe economic problems prior to the local polls. Erdogan will discuss the problems with militants in the Idlib zone in Syria with Putin.

In the global context, a big point of discussion is how long the recent increase in financial flows to emerging markets including Turkey can last.

EMs “most crowded” say investors
Bank of America Merrill Lynch’s (BAML’s) latest survey of investors marked a U-turn in sentiment towards EMs to “most crowded trade” in February from “short EM” in January, Reuters reported on February 12.

Assets named “most crowded” usually sink soon afterwards, Reuters noted.

The International Institute of Finance (IIF) is also among observers staying cautious on the latest rush into EMs.

“Inflows feel good to EMs while they last. But—as 2018 showed—they never last!” Robin Brooks of the IIF said on February 12 in a tweet.

Morgan Stanley estimates Turkey’s real rates are double the level for emerging markets as a whole, Bloomberg reported on February 12.

Meanwhile, the Turkish government, having become a retailer of cheap veg in the face of rampant food inflation and claimed dirty tricks with prices perpetrated by private retail businesses, said on February 12 that the Ministry of Treasury and Finance has mandated Citigroup, Kuwait Finance House and Standard Chartered to re-tap international markets with a USD-denominated lease certificate issuance on the international capital markets.

The latest sukuks from the Turkish government will have a maturity of three years, Reuters reported on the day, citing a document issued by one of the mandated lenders.

Also on February 12, the Turkish Treasury sold TRY2bn—including TRY985mn to the market—worth of non-coupon bills (re-open) due January 2020 at a yield of 19.26%, according to Reuters.

Real sector woes shown by tractor market
Contrary to the pinkish sentiment on the financial markets, the Turkish real sector keeps revising down its 2019 outlooks.

Turkey’s tractor market contracted 34% y/y to about 48,000 units in 2018 due to rising agricultural input costs and unfavourable weather conditions and Turk Traktor, which has a 43% domestic market share, expects the local market to contract further to 33,000-38,000 units in 2019, Aykut Ozuner, general manager of the company, said on February 11.

The domestic tractor market contracted by 51% to about 11,000 units in Q4.

Public lender Ziraat Bankasi, originally a lender in agro-finance but most recently busy providing loans to M&As in media and restructuring football clubs’ debts, finances 65-70% of total tractor sales on the domestic market while the remaining sum is financed by other lenders and tractor companies, according to figures provided by Turk Traktor deputy general manager Ahmet Canbeyli.

Basic agricultural input costs, including diesel oil, fertilizers and feedstuff, were subject to inflation rising from 25% y/y to 56% y/y in 2018, according to data compiled by Turk Traktor from statistical institute TUIK’s official data set.