Turkey begins fightback after 'mini crisis'
Saturday, 11 August 2007
Vincent Boland in Turkey
Turkey's army of local investors was given a taste of old times earlier this month, after the consumer finance division of Koc Holding, the country's largest conglomerate, offered for sale the first corporate bond issue in nearly a decade.
The TL100m ($69m) issue, which will pay a coupon of about two percentage points more than the central bank's overnight interest rate, will break no records.
But it is a sign that there is life still in the Turkish financial markets, which were badly rattled in May and June as emerging markets investors fled to safer havens amid uncertainty about the direction of US inflation and interest rates.
The jury has not yet reached a verdict on the consequences of the sell-off in the Turkish markets.
One argument for the defence is that there were few signs of panic among the Turkish public, which is wearily familiar with financial turmoil and has borne the brunt of previous and more destructive crises.
Still, Ercan Uygur, professor of economics at Ankara University, says that what happened should not be underestimated.
"What we experienced in May and June was a mini financial crisis," he says. "It was not a devastating crisis, but it was definitely a crisis."
The reawakening of Turkey's corporate bond market is one sign of a tentative recovery.
The domestic corporate bond market has been dormant for several years mainly because the public sector, with its insatiable appetite for cheap funding, had crowded out the private sector. The reduction of public borrowing under an agreement between Turkey and the International Monetary Fund is an important reason why the market should choose to reopen now.
But a TL100m bond issue, however encouraging, cannot hide the extent to which Turkey was affected by the emerging markets sell-off.
Asset prices had been driven to unsustainably high levels because of the country's booming economy, the prospects of accession to the European Union, the government's commitment to the fairly stringent terms of a $10bn loan arrangement with the IMF and by privatisation and a surge in mergers and acquisitions activity as foreign and domestic strategic investors snapped up targets in the banking, telecommunications and steel industries. The sell-off was arguably exacerbated by two domestic factors.
First, the government bungled the appointment of a new governor for the independent central bank, undermining confidence, however temporarily, in one of Turkey's few non-political institutions.
Second, the bank itself seemed to miss a resurgence in inflation, and was forced eventually to orchestrate a radical reversal of monetary policy, raising interest rates by 400 basis points after about five years of monetary easing.
The combination of external and internal factors amounted to something akin to a perfect storm, pushing stock prices down by 40 per cent in US dollar terms and 45 per cent in euro terms.
Yields on Turkish bonds, which had been falling steadily in tandem with the decline in interest rates, also surged.
In May alone, according to figures from Ata Invest, a brokerage firm in Istanbul, foreign investors pulled $3.1bn from lira-denominated treasury bills, and $1.1bn from foreign exchange deposits in the banking system.
Ozgur Altug, chief economist at Raymond James Securities in Istanbul, says investors withdrew between $8bn and $9bn from Turkish stocks and bonds during the sell-off. He estimates that the net outflow from the bond markets was $5.1bn.
These figures sound high, but it is worth bearing in mind two factors.
One is that foreign investors have historically owned about two thirds of the free float of the Istanbul stock exchange.
The other is that, in January, non-resident investors owned 12.2 per cent of the total domestic stock of Turkish debt; that proportion had fallen to between 8 per cent and 9 per cent by the end of June.
There are signs now that investors are beginning to trickle back into the Turkish markets. An estimated $300m has flowed back into stocks in the past two to three weeks.
Since the sell-off, which pushed the lira from TL1.3 to about TL1.77 to $1, the currency has recovered by about 15 per cent.
"People are starting to buy - mostly hedge funds but also dedicated funds," Mr Altug says.
But the sharp rise in interest rates is likely to depress corporate profits in the second half of 2006 and next year, and to depress the economy, which has expanded by about one third since 2002, Prof Uygur says.
That will change the perception among both portfolio investors and strategic investors of the attractiveness of Turkish assets.
Turkey remains a key emerging market, bankers, traders and economists say. But the past few weeks have reminded investors that, however much its domestic circumstances improve, it remains crucially and perhaps perpetually vulnerable to external factors.
Turkey's army of local investors was given a taste of old times earlier this month, after the consumer finance division of Koc Holding, the country's largest conglomerate, offered for sale the first corporate bond issue in nearly a decade.
The TL100m ($69m) issue, which will pay a coupon of about two percentage points more than the central bank's overnight interest rate, will break no records.
But it is a sign that there is life still in the Turkish financial markets, which were badly rattled in May and June as emerging markets investors fled to safer havens amid uncertainty about the direction of US inflation and interest rates.
The jury has not yet reached a verdict on the consequences of the sell-off in the Turkish markets.
One argument for the defence is that there were few signs of panic among the Turkish public, which is wearily familiar with financial turmoil and has borne the brunt of previous and more destructive crises.
Still, Ercan Uygur, professor of economics at Ankara University, says that what happened should not be underestimated.
"What we experienced in May and June was a mini financial crisis," he says. "It was not a devastating crisis, but it was definitely a crisis."
The reawakening of Turkey's corporate bond market is one sign of a tentative recovery.
The domestic corporate bond market has been dormant for several years mainly because the public sector, with its insatiable appetite for cheap funding, had crowded out the private sector. The reduction of public borrowing under an agreement between Turkey and the International Monetary Fund is an important reason why the market should choose to reopen now.
But a TL100m bond issue, however encouraging, cannot hide the extent to which Turkey was affected by the emerging markets sell-off.
Asset prices had been driven to unsustainably high levels because of the country's booming economy, the prospects of accession to the European Union, the government's commitment to the fairly stringent terms of a $10bn loan arrangement with the IMF and by privatisation and a surge in mergers and acquisitions activity as foreign and domestic strategic investors snapped up targets in the banking, telecommunications and steel industries. The sell-off was arguably exacerbated by two domestic factors.
First, the government bungled the appointment of a new governor for the independent central bank, undermining confidence, however temporarily, in one of Turkey's few non-political institutions.
Second, the bank itself seemed to miss a resurgence in inflation, and was forced eventually to orchestrate a radical reversal of monetary policy, raising interest rates by 400 basis points after about five years of monetary easing.
The combination of external and internal factors amounted to something akin to a perfect storm, pushing stock prices down by 40 per cent in US dollar terms and 45 per cent in euro terms.
Yields on Turkish bonds, which had been falling steadily in tandem with the decline in interest rates, also surged.
In May alone, according to figures from Ata Invest, a brokerage firm in Istanbul, foreign investors pulled $3.1bn from lira-denominated treasury bills, and $1.1bn from foreign exchange deposits in the banking system.
Ozgur Altug, chief economist at Raymond James Securities in Istanbul, says investors withdrew between $8bn and $9bn from Turkish stocks and bonds during the sell-off. He estimates that the net outflow from the bond markets was $5.1bn.
These figures sound high, but it is worth bearing in mind two factors.
One is that foreign investors have historically owned about two thirds of the free float of the Istanbul stock exchange.
The other is that, in January, non-resident investors owned 12.2 per cent of the total domestic stock of Turkish debt; that proportion had fallen to between 8 per cent and 9 per cent by the end of June.
There are signs now that investors are beginning to trickle back into the Turkish markets. An estimated $300m has flowed back into stocks in the past two to three weeks.
Since the sell-off, which pushed the lira from TL1.3 to about TL1.77 to $1, the currency has recovered by about 15 per cent.
"People are starting to buy - mostly hedge funds but also dedicated funds," Mr Altug says.
But the sharp rise in interest rates is likely to depress corporate profits in the second half of 2006 and next year, and to depress the economy, which has expanded by about one third since 2002, Prof Uygur says.
That will change the perception among both portfolio investors and strategic investors of the attractiveness of Turkish assets.
Turkey remains a key emerging market, bankers, traders and economists say. But the past few weeks have reminded investors that, however much its domestic circumstances improve, it remains crucially and perhaps perpetually vulnerable to external factors.