Page 33 - BNE_magazine_06_2019

bne June 2019 Cover story I 33
cash and replenish some of its spent reserves.”
In the latest 10-year eurobond auction held in January, the government paid
a yield of 7.68% to raise $2bn. The
issue now yields more than 8% and
debt capital markets bankers and fund managers now reportedly predict Turkey would have to pay an additional 40-60bp for any new issue.
But the Erdogan administration does not think about tomorrow. It is forever struggling to save the day. That has, at least, been the case since 2013. So, if the overarching need to access some cash is there, Ankara will almost certainly pay the premium.
How it could it be any other way?
Erdogan has painted himself into a corner with the IMF. The glorious president
said Turkey would never again need the institution, so how could it be any other way? And his unsuccessful attempts
to secure some financial support from a series of countries, including Qatar, China and Germany since last summer, are there for all to see in the rear-view mirror. So now, his game plan means that capital controls are on the cards.
No capital controls, you say? It seems that the international markets want Erdogan to step in front of the cameras and announce that he is indeed willing to introduce capital controls, when in fact they are already there.
If closing down the London lira swap market, bringing in a Tobin tax, controlling FX purchases higher than $100,000, imposing deposit and lending rate ceilings on banks, pushing private market makers to buy government bonds at lower than market prices, launching fruit and vegetable stalls to combat the private sector with fixed state prices, imposing price controls, raiding onion warehouses and so on are not capital controls then I apologise and will start this article again.
There is also a big question mark over how another policy rate hike would now help as the central bank’s monetary policy is dysfunctional in the face of
massive dollarisation, the government’s interest rate ceilings placed on lenders and officials’ manipulation of the domestic debt markets.
“We think that other measures will replace the monetary tightening as the local election taking place next month
is another political inflection point. As
a matter of fact, we believe that Turkey will move closer to controlling the market via regulatory measures instead of high benchmark rates. The short-term impact of such a substitution strategy on the local exchange rate is questionable. However, in the mid-term this should bring down FX volatility,” Sebastian Petric of Raiffeisen Bank said on May 22.
Bringing down FX volatility by regulating the market is actually an interesting perspective. Mr. Petric could
“Turkey has already shown that it doesn’t care if real money can’t hedge properly,” he added.
By now, both Reuters and Bloomberg show little hesitation in pointing to the Turkish government’s currency and interest rate manipulations that have been going on for more than
six months.
The veracity of the central bank’s reserve numbers have already been questioned. The next step is to question the reliabil- ity of the official inflation figures too. Reuters is heading down that path.
“I still don’t see Turkey doomed”
Although Bloomberg claimed with its headline that Turkey has burnt its bridges with the markets, it quoted Viktor Szabo of Aberdeen Standard
“Despite the currency crisis international lenders remained committed to funding the country's banks”
think of investing in Iranian debt as FX volatility is zero in the country when the FX black market is overlooked.
Waking up to puzzling inflation rates
Looking through the official lens, Turkey’s inflation rate is puzzlingly slowing in an import-dependent environment whereas the TRY has lost around 13% of its value against the USD so far this year. devaluation should spur inflation, not sink it.
Although Reuters referred to the way being open for eurobond sales with higher costs of 40-60bp, Bloomberg was harsher on May 22 in an op-ed entitled “Turkey Burns Bridges With Markets as Costs of Lira Defence Mount”.
Unlike Reuters’ unnamed investors ready to buy the Turkish government’s eurobonds at those higher costs, Win Thin of Brown Brothers told Bloomberg that he can’t see any significant flows returning until policy makers become more market-friendly.
in the last line of its article as saying: “Many policy errors were made, but I still don’t see Turkey doomed.”
Interestingly, Global Capital reiterated on May 21 that “investors react to headlines, but bank relationships tend to be stickier”.
“Turkey is the perfect example. with which they have long-established relationships. While investors sold Turkish sovereign bonds as fast as
they could in the run up to the local elections in March, lenders held steady, even providing Turkish borrowers with tighter margins on their semi-annual refinancings. Secondary loan market spreads widened only a little.”
Still, global lenders are only providing their Turkish peers with debt roll-overs and Turkey has been a net loan payer for a while. So, no additional cash is actually available from the foreign loans.
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