Page 19 - TURKRptSept19

2.4 INSIGHT: Turkish assets sliding as Erdogan regime’s grip on events weakens
Turkey’s USD-denominated sovereign eurobonds on August 27 extended a recent trend of depreciation caused by renewed and growing pressure on the Turkish lira, Reuters reported. The 2030 paper, which pays a coupon of 11.875%, fell to its lowest level since mid-July while the 2034 paper, which pays a coupon of 8%, fell by 1 cent, according to the news service. Each of Turkey’s 25 various outstanding USD-denominated sovereign eurobonds and each of its eight EUR-denominated eurobonds have lost value in August to date on a month-on-month basis while each of four USD-denominated international sukuk bonds gained ground, Is Invest’s daily bulletin showed on August 27. Turkish corporates’ eurobonds, meanwhile, delivered a mixed picture in the past month. On the currency markets, the USD/TRY rate dropped as far as one dollar to TRY 5.85 on the day. At around 22:10 Istanbul time, the lira was trading around 0.08% weaker at around 5.82. The lira has been depreciating since August 8 when it tested 5.45 and in the past two trading days, following a Japanese overnight ‘flash crash’ on August 26 said to have hit ‘mom and pop’ investors in the currency, when it plunged as far as 6.40, it has settled down at just over 5.80. Over the same period, the yields on Turkey’s 2 and 10-year domestic benchmark bonds rose to more than 16% from the 14%s, while 5-year credit default swaps (CDS) for Turkey are hovering above 400.
There is a long list of reasons why Turkish assets should depreciate, but explaining the market fluctuations in line with the actual news flow has not been possible in recent months.
Since November last year, in the eyes of many observers Turkey has gradually lost its free market status. That feeling was particularly keen after Erdogan administration officials, determined to control the TRY at a sensitive time, orchestrated a shutdown of the offshore lira swap market in London prior to the March 31 local polls, spooking foreign investors.
As things stand, current games seen on the Turkish markets involve the government versus locals who have less and less lira to buy dollars, and some vulture funds and some distant Asian funds who have no real idea about the market landscape in Turkey.
The global trade tensions and the re-escalated problems in the conflict-torn Idlib region of northwestern Syria are put forward as reasons for the latest descent seen in Turkish asset prices. There are even arguments abroad that suggest rate cuts expected to be introduced by the Turkish central bank are behind the pressure on assets although an unexplainable appreciation was observed in the local currency following the unexpectedly bold 425 bp cut pushed through by the monetary policy committee meeting held on July 25, marking the biggest rate decrease in Turkey in at least 17 years.
US President Donald Trump’s unpredictability in bargaining with trade rivals, particularly China, provides a continuous on-off cycle. However, the overall direction it is producing over the medium term is now clearly seen as negative. Market players no longer react strongly to potential good news as they don’t know which words out of Trump’s mouth they can trust, but at the same time markets use ‘The Donald’s’ spontaneous comments as reasons to create short-term volatility.
The global slowdown is now beginning to crystallise in Europe, with Germany—Turkey’s biggest trading partner—likely slipping into recession, and the Fed is under pressure to agree another rate cut at its next monetary meeting, scheduled for September 15-16.
The Turkish rate-setters are set to next convene on September 12. Forecasts envisage them bringing in easing of up to 325bp.
19 TURKEY Country Report September 2019 www.intellinews.com