Page 77 - TURKRptJun19

8.3.1 Equity market dynamics
Lira falls 1% and BIST-100 enters bear market as Turkey’s S-400 and monetary policies disappoint investors. The Turkish lira (TRY) fell nearly 1% during daytime trading hours on May 22 and shares hit a two-year low. Investors cited concerns about the row with Washington over Ankara's push to purchase the Russian S-400 missile system moving to the point where Turkey will be hit with sanctions and the central bank's reversal of recent backdoor monetary tightening. The TRY weakened to 6.11 levels against the dollar. The BIST-100 share index on the Istanbul stock exchange declined 1.9%. That meant it was down more than 20% from a high point reached in February and was now in bear market territory. Banking shares were the biggest drag on the bourse. Eighty four members of the exchange declined, with lenders Turkiye Garanti Bankasi and Akbank the worst performers in the slump. Defence Minister Hulusi Akar said late on May 21 that Turkey was preparing for potential US sanctions over its purchase of the Russian S-400 hardware, even while he said sentiment at talks with Washington over buying F-35 fighter jets had improved. The US has threatened to withhold the F-35s if Turkey buys the S-400, saying the latter could compromise the performance data of the former. The lira has fallen nearly 13% so far this year. It plunged nearly 30% last year. The central bank opened a repo auction on May 21 for the first time in nearly two weeks. The move will gradually bring down its average cost of funding to the policy rate of 24% from 25.5%.
Turkish banks are trading at almost half of their book value amid Turkey’s economic turmoil, according to Bloomberg data. As the country’s currency crisis threatens to return with a vengeance, investors are preparing for more hardship for Turkey’s lenders, with the 13-member Borsa Istanbul Banks Index having lost 18% over the past 12 months compared with a 9.3% drop in the Borsa Istanbul 100 Index (BIST-100). “Driven by mounting political chaos in Turkey and escalating fears of a US/China trade war, renewed pressure on the lira is unlikely to disappear anytime soon,” Bloomberg Intelligence analyst Tomasz Noetzel said on May 8. “This is a major threat to capital at domestic lenders, given that some 40 percent of the $460 billion of loans in Turkey are non-lira denominated.” The threat of higher interest rates and weaker capital levels are now on the horizon for Turkey, with the lira dropping to a seven-month low against the dollar this week. “The lira’s decline is adding salt to the wound,” Umit Ozlale, a professor of economics at Ozyegin University in Istanbul was quoted as saying by the news and financial data agency. The situation is “creating a vicious cycle in the economy,” he added. Turkish companies requested about $28bn of debt-restructurings following a 28% plunge in the lira against the dollar last year. The currency is already this year down by around another 14% versus the USD. The corporate sector’s foreign-exchange liabilities stood at $315bn as at the end February, almost 40% of the country’s gross domestic product. Even when netted against their foreign-exchange assets, the shortfall is $197bn, central bank data showed.
77 TURKEY Country Report June 2019 www.intellinews.com