If Morgan Stanley Capital International (MSCI) ejects Turkey from its emerging markets index it could suck almost a billion dollars out of the country’s stock markets, an economist has advised clients.
As reported by bne IntelliNews on June 24, MSCI is considering launching a consultation on a proposal to reclassify the MSCI Turkey Index to the Frontier Markets or Standalone Markets status if the accessibility level of the Turkish equity market further deteriorates.
Charles Robertson, global chief economist at Renaissance Capital, responded to the development with a note determining that some $900mn was at risk because asset managers that track the MSCI main emerging market index would have to liquidate if Turkey was booted out.
“Turkey’s importance has been shrinking as investors have increasingly steered clear of an unpredictable economy led by a president who believes higher interest rates create inflation,” Robertson wrote, adding: “A downgrade would be embarrassing for Turkey.”
Turkey’s corporate sector is hugely dependent on foreign investment flows. Investors are still suffering their latest bout of the jitters on the Turkish market since the Turkish lira (TRY) sank to an all-time low in May. Turkey’s economy, already fragile following the recession triggered by the August 2018 lira crisis, has now been battered by the effects of the coronavirus (COVID-19) pandemic on domestic demand, tourism and exports. A second recession within two years is on the cards, while the central bank has burnt up reserves attempting to defend the national currency.
A consultation launched by MSCI would only be the first step in the process leading to ejection. Starting a consultation would not automatically lead to a decision to pull Turkey from emerging markets status. But Turkey has a difficult relationship with foreign investors and news of Morgan Stanley’s doubts about Turkey can only add to the disquiet.
President Recep Tayyip Erdogan has frequently accused foreign speculators of destabilising the lira, while officials have squeezed liquidity from offshore markets, effectively preventing participants from shorting the currency.
MSCI said the introduction of short selling bans in October 2019 and stock lending bans in February 2020 had hindered access from abroad to Turkish shares.
Turkey had a weighting in the MSCI emerging market index of nearly 2% at the end of 2014, but it has now shrunk to 0.4%.
While foreign investors represent only 0.8% of the total Borsa Istanbul investor base, they account for around a quarter of its daily trading volume, according to Reuters. Also, non-residents now hold only around 6% of Turkey’s sovereign debt compared with 29% in 2013.
Kim Catechis, head of investment strategy at Legg Mason affiliate Martin Currie, told the news agency he expected MSCI would not eject Turkey from its emerging markets index for at least a year.
Nonetheless, the country’s unorthodox economic policy and predominantly debt-funded investment landscape had created real concern over the sustainability of the situation already pre-COVID-19. “For investors, the cocktail looks increasingly unappetising,” Catechis added.