Page 10 - bne_March2019_20190306 magazine

10 I Companies & Markets bne March 2019
HSBC Holdings Plc earned about $120mn in a single day during Turkey’s financial crisis in August as it profited from the collapse of the lira, Bloomberg reported on February 19. However, the lira’s collapse over the summer hit trading profits at some investment banks with exposure to the country, such as Barclays Plc.
Capital Economics expects the lira to weaken to 6.25 against USD by end-2019. This primarily reflects the large inflation
“Although VTBC is in its ‘neutral’ territory for various metrics, it believes that there will be attractive trading opportunities for Turkish assets in 2019”
differential between Turkey and the US, which means the nominal exchange rate needs to weaken to prevent the real exchange rate from appreciating.
Macro backdrop continues to improve
The stock market and currency recovery rally may be running out of steam, but Turkey’s fundamental growth story remains in place and the economy continues its surprisingly fast recovery.
VTB cut its GDP contraction forecast for 2019 to 3% from a previous 4% due to more dovish global outlook. It expects a budget deficit of 4.6% of GDP in 2019.
VTB Capital expects inflation to ease to 14.5% by end-2019. However, as interest rates have already fallen since the highs in 3Q18, and the investment bank sees from 2Q19 onwards, pressure on the lira and interest rates might escalate. VTB believes falling inflation and interest rates throughout this year have already priced in.
Annual food inflation in Turkey will likely be slower in February than in the previous month after state-run stalls in large cities opened last week, an unnamed Turkish official familiar with the figures told Bloomberg on February 20.
Total FX deposits at Turkish lenders reached $200bn as
of February 15 while the central bank’s gross FX reserves slightly declined to $98.6bn, the central bank data showed on February 21.
On February 20, TUIK said that Turkish consumer confidence fell to 57.8 in February. Turks’ confidence fell to 59.9 in
September and it remained close to the lowest level seen in October since then.
Based on VTB’s future inflation forecast, the current real interest rate for Turkey is some 3% and it is in line with the correlation implied by the current US 10-year yields.
VTB expects the central bank to eventually start cutting policy rates, likely after March 31 local polls, and to cut an overall 500bp at least by end-2019.
Capital Economics expects the benchmark one-week repo
rate to be lowered from 24.00% now to 20.00% by end-2019, whereas the markets have pencilled in a total of around 600bp of cuts by year-end.
The average Turkish man on the street has been switching
to FX from TRY since September, while corporates stopped reducing FX deposits, Tuzun also noted, adding that there has been over $20bn deposit outflow from the banking system since the currency crisis in July-August, mostly due to corporates paying back FX-debt.
Share of FX deposits at Turkish lenders climbed to 13-year high so far this year, Bloomberg reported on February 20.
On a 12-month sum basis, Turkey’s current account deficit has narrowed from as much as 6.5% of GDP in mid-2018 to 3.6% of GDP in December, according to Tuvey’s calculations. Capital Economics thinks that Turkey will post a small surplus this year – there is a whopping $175bn (22% of GDP) of external debt that needs to be serviced over the next twelve months. More than half of this debt lies in the banking sector, a legacy of the past decade’s credit boom. The upshot is that Turkey’s
“VTB cut its GDP contraction forecast for 2019 to 3% from a previous 4% due to more dovish global outlook”
external financing needs are still extremely high relative to the size of its FX reserves.
The improvement in sentiment towards EMs at the start of 2018 was accompanied by a pick-up in capital flows
in January, Liam Carson of Capital Economics said on February 14 in a research note, adding: “It looks like this was concentrated in flows to EM bond and equity markets, and timely figures suggest that this trend continued in early February.”
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