The crisis persists: Turkey's stock markets are floundering and it's about more than corruption
The benchmark index slumped 15% in dollar terms last month, the most among more than 90 gauges tracked by Bloomberg. The measure extended last year’s slide to 27%, as a corruption probe embroiled Erdogan’s cabinet and led to three ministerial resignations. The crisis threatens to undo the economic gains Erdogan made in orchestrating a decade of almost uninterrupted growth that earned Turkey its first investment-grade credit ratings since the early 1990s Bloomberg Istanbul /New York T The mounting power struggle between Turkish Prime Minister Recep Tayyip Erdogan and the judiciary is turning the country’s stock market into the world’s worst performer and driving the currency to unprecedented lows. The Borsa Istanbul 100 Index slumped 15% in dollar terms last month, the most among more than 90 benchmark gauges tracked by Bloomberg. The measure extended last year’s slide to 27%, as a corruption probe embroiled Erdogan’s cabinet and led to three ministerial resignations. Turkey’s lira lost 4.9% in December, second only to Argentina’s peso among emerging-market currencies, and traded at a record low of 2.1764 per dollar by end-December. The crisis threatens to undo the economic gains Erdogan made in orchestrating a decade of almost uninterrupted growth that earned Turkey its first investment-grade credit ratings since the early 1990s. The investigation, which Erdogan labelled a coup attempt, is deepening the conflict between the government and followers of US-based cleric Fethullah Gulen, who are influential in the judiciary and police force. “This is going to make Turkey stick out like a sore thumb,” Arnab Das, founder of London-based consultancy Das Capital, said in a telephone interview on December 26. “The risks in Turkey are becoming more manifest.” Ihlas Holding, an Istanbul-based holding company of construction, healthcare and education businesses, fell 66% last year, the worst performer among the 100 members in the Borsa index. Anel Elektrik Proje Taahhut ve Ticaret, which offers electromechanical contracting services, tumbled 53%. Investors are also dumping Turkish bonds at the fastest pace in two years, sending yields on benchmark two-year notes to a 23-month high of 10.17% on December 27, according to data compiled by Bloomberg. Foreigners sold a net $1.9bn in the two weeks through December 20, cutting holdings to a three-month low of $54bn, from $72bn in May, central bank data show. “If interest rates were to remain elevated for a long period and if the currency were to continue weakening, then it definitely would start to impinge on economic performance,” Julian Rimmer, a broker at London-based CF Global Trading UK Ltd, said in a telephone interview on December 27. The investigation has become the battleground in a struggle for control of the country between Erdogan and Gulen. The cleric broke with the prime minister last year, ending a partnership that had helped sustain the single-party government since 2002. For some investors, it has been an opportunity to purchase shares cheaply. BlackRock Inc, the world’s biggest money manager, said on December 23 it added to its Turkish holdings, especially financial stocks, in a bet that the worst of the turmoil may have passed. The crisis began on December 17 with arrest of the sons of three cabinet ministers as well as the chief executive officer of state-run Turkiye Halk Bankasi amid probes into bribery, money laundering, gold smuggling and corruption in government tenders. Erdogan said in a December 27 televised speech that it was an attempt to derail the government. Earlier that day, a top judicial body blocked his order requiring the government to be notified of investigations, a ruling he called unconstitutional. “What started as a local power struggle within the ruling political elite would appear to have become an issue broad enough to not only destabilise Turkey’s financial markets but potentially spill over into the wider arena of emerging market fixed-income and currency markets,” Michael Shaoul, chief executive officer of Marketfield Asset Management, wrote in a note to clients on December 27. Until last year, Turkey, the Middle East’s only member of the North Atlantic Treaty Organisation, was an investor favourite as Erdogan fought off pressure from secularist generals, reined in government spending and sold state-owned companies. The benchmark stock index jumped 505% in dollar terms between March 2003, when Erdogan took office, and the end of 2012, compared with the 275% gain in the MSCI Emerging Market Index. Dollar-denominated bonds returned 207%, outpacing the 173% increase in JPMorgan Chase & Co’s EMBIG Diversified index for emerging markets. Investors started to pull back in May when the Federal Reserve signalled it was preparing to withdraw the US monetary stimulus that had helped fuel demand for developing-nation assets over the past five years. That month, anti-government protests over a planned development in Istanbul spread across the country in the worst unrest during Erdogan’s reign. “The underlying issue is that Erdogan is becoming more authoritarian and less focused on the institutions in Turkey,” Das said. “That’s ultimately got to be a bad thing.” The probe is compounding the challenges Erdogan faces before elections this year because the country relies on foreign investment to finance the current-account gap, the largest in the Middle East. The deficit will widen to 7.1% of gross domestic product this year from 6.1% last year, according to government projections. “When you’re thinking about these stories like Turkey in the coming year, the consensus right now is extremely bearish,” Robert Abad, who helps oversee $53bn including Turkish dollar bonds at Western Asset Management Co, said in a telephone interview from Pasadena, California, on December 27. To prop up the lira, the central bank said on December 24 it will sell at least $6bn in auctions through the end of January and make it more costly for lenders to park foreign currencies in the bank’s coffers. It sold $450mn on December 27 after receiving bids for almost double that amount. Such efforts may not be enough to stem the selloff, according to Walter Todd, who oversees about $950mn as chief investment officer of Greenwood Capital Associates. “Anytime there’s instability in an emerging market like that, it’s never a good thing,” Todd said in a telephone interview from Greenwood, South Carolina. “It’ll probably get worse before there’s some type of turnaround resolution to any of this.”
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