Turkey’s Untoward Twittering Classes
Turkish officials who have been favored headliners scrambled to reassure investors in a series of meetings and seminars at the spring IMF-World Bank event, following a ratings outlook demotion and Prime Minister Erdogan’s strong party showing in local elections despite popular backlash over corruption reports and attempts to stifle social media coverage. Stocks and bonds went positive as the lira stabilized at just over 2/dollar, with the central bank foreshadowing benchmark interest rate reduction from double-digits after “review” was urged by ruling AKP supporters who intend to tap a successor soon should Erdogan run for President in August. Two-year local debt yields remain at 10 percent as plans for $2 billion in sovereign Eurobond issuance for the rest of 2014 are already in course. According to the latest statistics foreign obligations approach half of GDP, but two-thirds are from private sector banks and companies. The current account gap was the worst among the G-20 last year at 8 percent of output, but has since moderated with a credit expansion squeeze to single digits and lower oil imports. The economic growth target continues at 4 percent and fiscal policy assumes primary surpluses particularly as political spending urgency has abated on incumbent triumph. Geopolitical jitters from Iran and Syria may upset the mix, but diplomatic overtures toward EU membership and Cyprus reunification may offer a counterweight. Russia sanctions may also bite as representatives were shunned during the meetings despite reiterating ruble flexibility and no capital control mantras. Equities are Europe’s bottom performers as Moscow admits to stagflation and another post-2008 crisis challenge after raising rates 150 basis points and currency intervention scope. The IMF unveiled a gloomy forecast at the same time for outright recession if trade and financial boycotts worsen, with capital flight set at $150 billion. It warned of spillover effects throughout the Caucuses and Central Asia, especially in Armenia and Kazakhstan due to remittance channels. Local bond auctions have regularly failed on premium demands and US-listed ADRs suffered a scare when delisting and repatriation were urged to evade diplomatic penalties. President Putin has threatened Europe with energy cutoff as he turns to China for new deals, while commodity giant Rusal is again in restructuring talks after its post-Lehman rescue led by Sberbank and an international syndicate which may not be as amenable in the current antagonistic climate.
Ukraine in contrast was received sympathetically as pro-Russia attacks spread in eastern cities as the Fund’s board considered a $15 billion-plus program prior to scheduled end-May elections. Despite a ratings downgrade to near default, bonds rallied to a 5 percent EMBI gain as Franklin Templeton maintained its large position and investor haircuts were essentially excluded in the preliminary phase given the small amount at stake. The central bank chief commented in Washington that outstanding gas bills would be honored as subsidies are removed, and that the exchange rate would float in the future as one-quarter of banks undergo a fiercer form of stress testing.
