London, May 29/2010 Turkish President Tayyip Erdogan won the second round of elections and extended his term of office for a third decade. The country is struggling with high cost of living, lack of funds and depleted foreign reserves.
Market response:
Lira: The Turkish currency touched a record low of 20.105 on Monday. It has fallen more than 7% since the beginning of the year, and has lost more than 90% of its value in the last decade.
Debt: Turkish international bonds were mixed, with the 2030 issue gaining 0.5 cents, while other maturities eased 0.2 cents. Five-year credit default swaps hovered around Friday’s closing levels.
STOCKS: Turkey’s benchmark index (.XU100) rose 4.4% on Monday, while the banking sub-index (.XBANK) was trading 3.1% higher.
Comments:
Mina Cusisto, Chief Analyst, Danske Bank
“Recipe Tayyip Erdogan has closed his iron grip on Turkey. In the absence of a change in economic policy, a worsening currency crisis is at risk.”
“With Turkey running out of foreign currency, the value of the lira could collapse, inflation could explode and commodity shortages could occur. Turkish corporations with large foreign debts could face the risk of default.”
Jeff Grills, Head of EM Debt, Aegon ASSET Management
“Turkey’s main concern is the continued challenges of maintaining economic stability and attracting investors’ confidence. The election results, with Erdogan’s strong majority, suggest the continuation of policies that have contributed to the deterioration of the country’s fundamentals.”
“The decline in the value of the lira and pressure on low reserves add to concerns for bond investors. Investors will focus on Erdogan’s ability to make significant changes in policy to address these challenges. Turkey’s economic woes and US dollar bonds are expected to continue to underperform in the medium term.”
Roger Marks, Ninety One analyst
“In our view, Erdogan’s biggest challenge is the Turkish economy. His victory comes against a backdrop of dangerous economic imbalances, with a heterodox economic model increasingly unsustainable.”
“If the policy direction is not changed, Turkey is heading for a severe debt-payments crisis, with an increasing likelihood of stricter capital controls. In the worst case scenario, this could see widespread ‘lirafication’ (forced conversion) of residents. Dollar deposits and the prospect of Turkish borrowers defaulting on foreign obligations.” “
Hasnain Malik, head of equality research at Telemer
“Erdoğan’s victory will not bring any comfort to any foreign investors. A tragic crisis affecting all assets is on the way, very high inflation, very low interest rates and no net foreign reserves. Only the most optimistic hope that Erdogan feels safe enough now. Let us return to politically orthodox economic policy.
Clemens Graf, Associate Head of CIMA Economics, Goldman Sachs
“After the markets reacted strongly to the results of the first round, as opposed to surprising the markets, we think the results of the second round are now largely expected and we do not expect too much of a quick market reaction. The market’s focus will continue to be on TCMB’s FX stocks and TRY (Turkish Lira) international stocks from the beginning of the year.” They have fallen steadily since and have already approached levels when volatility increased dramatically.
“With the election now behind us, we have maintained our rate forecast. Our previous forecast was probability weighted based on the outcome of the election. With President Erdogan now re-elected, we will revert to a modal forecast.”
Sardar Pazi, director of the Global Securities Research Group
“The short-term rally in stocks, especially with the exchange rate, may last above 20 levels. Until then, exporters may benefit greatly. Mr. Erdogan praised the low interest rate policy during the campaign. And in his victory speech last night, we think a reversal of this policy is unlikely, at least. Until the local election at the end of 1Q24, check for TRY depreciation amid high current account deficit and low FX reserves.
Erkan Erguzel, Barclays
“On the picture of assets and liabilities … and the growing costs of external financing, we think that it is Turkey.
It requires adjustment for both FX and rates. Relatively light pressure from external financial needs during the summer will provide an opportunity to make this adjustment gradually.”
Thomas Gillett, Director of Sovereign Ratings, Boundary Ratings
“Capital controls and macroprudential measures, such as restrictions on cash withdrawals, deposit protection schemes and enforcement measures on banks’ portfolio allocations, remain central to Turkey’s economic policies.
“Turkey needs additional bilateral and mostly unconditional foreign support in the form of direct loans, remittances and energy trade agreements to partially alleviate the high pressure on the balance of payments.”
“Misguided policy-making is bound to exacerbate macroeconomic imbalances, raise the risks of disorderly adjustment, and make any period of policy normalization more complicated to navigate over the longer term.”
Eric Meyerson, Chief M Strategist, Seb Group
“We expect Erdogan to see his re-election as a vindication of his broad policies, economic and foreign, albeit under the most brutal authoritarian institutions and in the absence of free and fair elections.
“The policy environment, deteriorating economic fundamentals, the upcoming election cycle and expected foreign policy challenges make Turkey vulnerable to various shocks, both domestic and external.”
Tunkai Tursuku, founder of Tunkai Tursuku Research and Consulting
“Yesterday, President Erdoğan’s economic-oriented statement and his emphasis on internationally respected financial management created hope in the markets for a change in the current economic policy. This can be said to have an impact on today’s strong (stock) purchases.
But in order for this growth to be sustainable, it is necessary to decide the cabinet, clarify the names coming to economic management and announce a new roadmap on the economy.
Reporting by Karin Strohecker, Libby George, Kanan Sevgili and Rodrigo Campos; Edited by William McLean and Mark Heinrich
Our Standards: The Thomson Reuters Trust Principles.
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