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has peaked in Q3, and will slow in Q4.”
Timothy Ash, senior sovereign strategist at BlueBay Asset Management – who, to a fair degree, sprang to the defence of Turkey in mid-September when Com- merzbank put out a report questioning the country’s official growth figures and suggesting that its economic “miracle” was not actually happening – said in a note to investors on 28 September that
tions, locals have persistently remained on the other side, as reflected in the constant accumulation of FX deposits, now at/close to record highs.”
This, remarks Ash, “is unusual in the Turkish context, as I cannot remember a time when the locals have forgone opportunities from a cheap lira and carry for this long – faced with a strong foreign bid they have always
“70% of Turkey’s [current account deficit] is now covered from ‘hot money’ portfolio inflows”
“Turkey is becoming quite a challenging story/market to read”, adding: “Quite
a few negatives are building up.”
Ash observes: “Particularly worrying
in my mind is that the quality of financing has deteriorated this year, with 70% of Turkey’s [current account deficit] now covered from ‘hot money’ portfolio inflows, and a smaller share (25-30%) from net FDI and longer-term investment flows. Errors and omissions have turned negative, perhaps reflective of capital flight, and the CBRT [Central Bank of Turkey] has been spending limited FX reserves to help support
the currency.”
Turkey’s underlying and longstanding weak external financing position, with the official CAD standing at $39bn, or 4.6% of GDP, and widening despite a competitive currency (the real effective exchange rate has been back at 2003 lev- els), is also a concern to Ash. Add in the weight of the $165bn short-term debt, and the external financing requirement comes in at more than $200bn, or 25% of GDP, for 2017.
Nervous locals forego cheap lira
Another conundrum pointed out by Ash is that “while foreigners have been on the bid for lira for much of the period since the April referendum on constitu- tional reform [to introduce an executive presidency with sweeping powers], attracted by the high carry/volume, and still liquid global financing condi-
eventually tended to throw the towel in. What this seems to reflect is an underlying concern from a section of the population over broader political trends (polarisation) in the country, and perhaps nervousness over the extended state of emergency [in place since July last year]. I guess logically the constant purges against Gulenists, and those associated therein (rightly/ wrongly), creates nervousness and
a natural desire to sit on FX.”
Clearly, concludes Ash, the combination of a weak underlying external financing position, plus reliance on hot money foreign financing, and also the strong and continued local bid for FX, “leaves the market vulnerable say to a change in global sentiment, if/as the Fed tightens, as the combination of locals and foreigners selling would then be
all powerful”.
Bears feeling chipper
Getting back to the Istanbul bourse – the September decline of which was the first monthly reversal since November 2016 – somebody’s pain is as always somebody else’s gain. The bears are feeling chipper, with short traders piling into bets on the rally crumbling.
“Turkey has started to underperform and once it starts, it goes pretty fast,” Maarten-Jan Bakkum, a senior strategist at NN Investment Partners, told Bloomberg on 24 September, adding: “It is going well for me for a few weeks.”
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