Turkey’s Heaping Host Histrionics
Turkish stocks after topping the region in 2014 surrendered ground through February as President Erdogan again tussled with the central bank over interest rates, as regulators took over Bank Asya controlled by his exiled adversary Gulen just before Istanbul hosted the G-20 summit heavily focused on global currency swings and European sanctions and bailout disputes. The seizure of bank shares due to lack of “ownership transparency” further roiled sector listings that lagged last year’s index surge. Capital adequacy is 15 percent of assets but the loan-to-deposit ratio is close to120 percent with heavy reliance on wholesale overseas funding. Foreign currency debt has doubled to $150 billion post-crisis and half is short-term and reserve requirements were raised 5 percent to 18 percent recently to curb appetite. The current account deficit otherwise has improved to 5.5 percent of GDP with reduced oil imports despite lost export markets in Russia and Iraq. The continued primary surplus will enable lower domestic borrowing as foreign investors maintain positions despite lira weakening toward 3/dollar and mixed signals about rate direction with one benchmark cut among the three used but 7 percent inflation still above target. Growth is slated at 3 percent this year and officials have pledged education and labor reforms to raise productivity while remaining diverted by geopolitics. The ISIS war and refugee crisis continue to swamp the Syrian border and Iraqi Kurdistan’s independence, as it prepares an inaugural sovereign bond, has raised the stakes on Turkish community empowerment. Cyprus resolution has also re-entered the mix after the IMF-EU rescue and the two sides argue over offshore hydrocarbon claims. The Islamic AK party was denigrated by far-right parties in Greece now tentatively allied with the victorious Syriza which has demanded reparations for past historical conflicts. The harsher rhetoric may reverse recent strides in bilateral trade and investment cooperation as Akbank kept its cross-border presence before Athens’ latest political changes and demands for further debt relief.
The Greek saga featured at the Istanbul G-20 meeting where Russia’s post-sanctions and oil boom meltdown was a mainstream business focus as informal and formal commerce and tourism dry up. Turkish workers have returned home in droves with recession and double-digit inflation and the crashing ruble. Stocks bounced off the bottom on the MSCI index but another small bank was seized as state giants Sberbank and VTB reported earnings declines. Corporate debt in turn has not yet followed the sovereign in sweeping ratings downgrades as oil behemoth Rosneft intends to meet immediate payments. Local government bond auctions have resumed and President Putin agreed after a second Minsk leader gathering to another East Ukraine cease-fire with thousands already killed and displaced. Kiev’s US-trained Finance Minister solicited Russian bond-holder input for a voluntary restructuring to accompany an expanded IMF program. The private sector contribution with at least maturity extension would be one-third to the $40 billion multi-year effort with bilateral and multilateral actors not as visible in the future drama.
