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Investors want to gobble up Turkey

I spent the first half of the week in London, invited by an investment bank to speak to their clients on the Turkish economy. I met with half a dozen or so investors on Tuesday.

Here is the intro. to my Hurriyet Daily News (HDN) column, where I summarized my impressions from my investor trip last week.  You can read the whole thing at the HDN web site. Of course, since I have a 3000-character limit, I had to leave many things out. Luckily, I have this blog, so read on after you are done with the column.

As  I mentioned in the column, all investors were wondering if Turkey would get a second investment grade and how the Central Bank would react if capital flows to Turkey accelerated. We will get partial answers to both questions next week: Tuesday is the Monetary Policy Committee rate-setting meeting, whereas Moody’s will be holding its annual Turkey Credit Risk Conference on Wednesday. My HDN column next Monday is devoted to these topics, but to give loyal readers a bit of the scoop, here is how I am thinking about both events:

As for the MPC, it is very very tricky. For one thing, everyone has been expecting, even since the latest MPC, that the Bank would continue with another gradual (perhaps 50bp) cut in the ceiling of the interest rate corridor, while at the same time increasing Reserve Option Coefficients (ROCs) further. After Central Bank Governor Erdem Basci talked the lira down on Monday by giving specific real exchange rates beyond which the Bank would intervene (you can read the details in my fresh-out-of-the-oven HDN column, which was published just minutes ago), expectations of easing in the floor of the corridor started being priced in as well, as bonds fell to historic lows.

However, global developments complicate this picture: Fiscal cliff worries led to risk aversion this week, and EMs including Turkey did not see inflows. This mini capital stop went almost unnoticed in Turkey because of the locals’ bond rally I mentioned above. So the Central Bank may not want to cut rates based on this choppy global climate. Or it may see this as temporary phenomenon and undertake a cut in the floor, taking into consideration the strong demand in EM assets: Investors I talked to during my London trip told me that the bonds of several countries with apparently weaker macroeconomic fundamentals, such as Bolivia and Zimbabwe, had recently seen record demand. You can read more about the increasing popularity of EM bonds in recent BIS or Deutsche report.

As for my take: I am not all that surprised by this week’s mini-stop: I had argued in my HDN column about the economic consequences of the U.S. elections that I was expecting some market turmoil because of the fiscal cliff after an Obama victory. In the longer scheme of things, I believe the hunt for yields should continue, but I think the Central Bank will not want to risk more turmoil by cutting the floor now and wait until the next MPC, until when the fiscal cliff will probably be resolved. Note that economists surveyed by Turkish business channel CNBC-e are evenly divided between a cut in the floor and no cut. If I am right, we’ll see an upward move in bond yields early next week.

As a final point, note that money market rates are already at the floor of the corridor, so for any “real” easing, the Bank would have cut the floor…

As for Moody’s, I believe they were, and have been, for some time moody on Turkey because of the country’s external vulnerabilities. They noted at the end of October that they would “consider upgrading Turkey’s rating if the government made further progress in lowering its external vulnerabilities by structurally reducing its current account deficit, increasing foreign exchange reserves or reducing the private sector’s external borrowing”. Now, let’s look at the data:

While it showed that the external adjustment is losing steam, today’s September current account deficit came in lower than expected, and the improvement in the current account deficit continued. Besides, the deficit will probably end the year at 7-7.2 percent of GDP, much lower than the rating agency’s 7.8 percent forecast in its October report. And reserves are now around $100 bn. Never mind that reduction in the current account deficit is not structural, and the increase in reserves is just because of rise in banks’ FX deposits at the CBT because of ROCs- net reserves have been hovering around $50 bn for a long time. Moody’s could easily claim that two of its three conditions have been satisfied. So while my main scenario is no upgrade from Moody’s this year, I am not ruling out anything.

It is also important to note that markets have been very moody on Moody’s: First, they thought Turkey wasn’t getting an upgrade based on the end-October report. Then, they started expecting one, as the agency announced the Turkey conference. While an analogy to Fitch, which upgraded the country 3 days before its conference, was made, Moody’s had originally announced its conference during the summer. And finally, when the agency said their view on Turkey had not changed since the October report, expectations of an upgrade died again. My point is that these swings in expectations are very moody and not very rational. If you thought that Turkey would/would  not get an upgrade when the October report came out, there is no reason you should have changed your opinion, either when the conference was announced or on Wednesday.

Anyway, returning to my investor trip impressions, I was surprised to find most investors aware of political risks in Turkey. I was also expecting political risks to come up, but investors were wondering about domestic political issues as well. One of the most common questions was who would be PM Erdogan’s successor if he decided to go for the Presidency, with or without a new Constitution that would make him an American-type President. I explained investors that it may not be a very smooth transition as many are expecting, as I had argued some time ago: Given his increasingly critical tone of the ruling Justice and Development Party (AKP) and his once brother-in-arms Erdogan, Gul simply may not want to give up the Presidency. He may also want to go for PM himself, putting a stone in the way of, as we Turks say, Erdogan’s probable Putin-Medvedev model of placing a puppet as PM.

The other question I received several times was who would be the new economy tzar if rumors of Babacan leaving before 2015, when his time is up because of the AKP’s bylaws, turn out to be true. I confirmed that Babacan is very popular with investors. So is Finance Minister Mehmet Simsek, who is personally known to several investors I spoke to because of his days in Merrill Lynch London. I basically told that that they should be wary if Economy Minister Zafer Caglayan, affectionately known as the Admiral takes the helm.

All in all, I saw two types of investors: Those who missed the Turkey bandwagon worrying about the current account deficit and those who didn’t. Both types are now Turkey-positive, it seems. Therefore, the main theme of my trip was the following: if you are a devout disciple of the “dismal science” like me and a perennial pessimist, a one-day chat with foreign investors is enough to make you rosy on Turkish economic prospects:)….

3 Responses to “Investors want to gobble up Turkey”

Metin GunduzNovember 20th, 2012 at 11:26 am

Recent Reduction of Current Account Deficit of Turkey (more than predicted) is mostly Export increase led CA reduction( rather than slowing Growth rate and decreased imports ) , this positive result clearly based on effective and persistent Money Market Policy decisions made by the TCB (Turkish Central Bank) in order to maintain ‘Competitive Currency Basket Rate’ for the Turkish Lira/ exports consciously – rather than false belief and assumption that TCB does not interfere foreign Currency Market by policy – as a matter of fact Currency Control ‘ fundamentally required ’ for the Financial Stability of Turkish Capital Markets ( particularly to control the notorious financial Balloons ) in free market economy –

Metin GunduzNovember 20th, 2012 at 11:26 am

So TCB not only controls the inflation but also ‘financial stability’ which means ‘Turkish Currency Control’ . TCB will NOT tolerate the reversing the recently hard gained positive trend of Current Account Deficit reduction ( this trend actually led to recent FITCH investment grade rating increase for Turkish Economy ) .
And most importantly recently enacted IV.Teşvik Paketi(system) which was released on April 5th 2012 (effective January 1st ) until the end of 2014 by the Turkish Government absolutely requires ‘synchronized Macroeconomic Policy ‘ by the Turkish Central Bank’s Money Policy Committee in order to create ‘optimum investment environment for the Foreign Long Term Investment Capital inflow ( rather then speculative short term portfolio investments at IMKB ) , e.g.(Competitive labor prices , lower local currency interest rates( lower 1 week repo rate ) , and strict effective stable currency basket control ) … http://www.inovatifhaber.com/haber/basbakan-erdog… in Turkish)

Metin GunduzNovember 20th, 2012 at 11:27 am

So the bottom line ; at the end of the road (no matter how choppy the current world capital markets- in fact they have been choppy all along since late 2008s ,nothing new ) Money Policy Committee of TCB will eventually decide to lower Turkish 1 week Repo rate(money policy target interest rate) as well as the lower limit of the interest corridor , rather than ineffectively ‘shooting blank’ (as proven clearly) by consecutively lowering the upper limit of interest rate corridor .

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Emre Deliveli The Kapali Carsi

Emre Deliveli is a freelance consultant, part-time lecturer in economics and columnist. Previously, Emre worked as economist for Citi Istanbul, covering Turkey and the Balkans. He was previously Director of Economic Studies at the Economic Policy Research Foundation of Turkey in Ankara and has has also worked at the World Bank, OECD, McKinsey and the Central Bank of Turkey. Emre holds a B.A., summa cum laude, from Yale University and undertook his PhD studies at Harvard University, in Economics.

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