It’s fair to say that the structural economic reform programme presented by Turkish Finance Minister Berat Albayrak on April 10 went down like a lead balloon with many analysts.

With Turkey facing another bout of the currency crisis blues and mired in an ugly recession, investors were hoping for something to get their teeth stuck into. The verdict from Fidelity International? “Underwhelming”.

So lead balloon or nothingburger—describe it how you will, the reviews were not kind—has Albayrak now put himself in a situation where, as Timothy Ash at BlueBay Asset Management had it, there is a “narrow window of opportunity for [him] to deliver reform without going to the IMF”?

Ash also noted that the Turkish economy is facing additional headwinds from the S-400 missile defence issue—that’s right, Albayrak’s strongman father in-law and executive president Recep Tayyip Erdogan is telling anyone who’ll listen that he really doesn’t care about putting the wind up Washington and Nato by going ahead with the purchase of some of the Kremlin’s top military hardware and may even get the delivery speeded up!—and the Istanbul election headache—Erdogan, who made his name as mayor of the business capital, could well be about to cause a big stink as to whether Turkey can still claim to be a democracy by supporting the annulment of the painful Istanbul poll loss to the opposition on the basis of… well, the precise nature of the alleged dodgy goings-on are none too clear yet but they can move for annulment and fill in the details later—but getting back to the underwhelmed Fidelity we have money manager Paul Greer sighing—sorry, saying—in a note that Albayrak left observers dissatisfied “particularly in regard to Turkey’s fiscal trajectory”.

PowerPoint Man
Albayrak, developing something of a reputation as PowerPoint Man—it’s not just the content but the graphics of his show that leave something to be desired—also, according to a reading of Greer’s note appears to have fanned existing concerns by offering “scant” detail on how to deal in a sustainable manner with rising non-performing loans in the energy and construction sectors, support exports, improve pension savings and reduce food price inflation.
Turkey, added Greer, continued to have “very low” net FX reserves given the size of its economy, while “the recent sharp dollarisation of local deposits” (locals aren’t buying the ‘We can do this without the IMF’ bravado) is a big concern and “the outstanding issue of the Istanbul local election result is keeping investors anxious”.

Coming to Albayrak’s attempted star turn—leaked on April 9—namely his pledge to boost the capital level of banks and relieve their bad debts, Greer perked up just a wee bit saying the recapitalisation plan—the biggest since 2001--announced for the public lenders was “a mildly positive development” because it highlighted the government’s implicit acknowledgment of lower capital ratios and rising non-performing loans.

Turkey, PowerPointed Albayrak, would deliver Turkish lira (TRY) 28bn ($4.9bn) to recapitalise state banks, adding that private banks could increase their capital if need be. Analysts, reported Reuters, responded by weighing the benefits for banks against the risk of higher deficits and potential overreach by a government prone to stop-gap measures. Perish the thought!

Dividend and bonus payments would be limited—banking watchdog BDDK has already been active in that regard and it looks like it may have the same mission into next year—as the economy rebalanced, and some problem loans would be transferred to off balance sheet funds of local banks and international investors, according to Albayrak’s presentation, adding that two funds focusing on energy and real estate would be created.

“This change and reform process will continue decisively for the next four years,” Albayrak then asserted.

Government’s message contradictory
Cristian Maggio, head of emerging markets strategy at TD Securities in London, was quoted by Reuters as saying the message of government support and fiscal discipline was contradictory. “The market will be very sensitive to any deterioration of the budget, because that is one of the few anchors that Turkey still has,” he said.

Last October, Turkey pledged to reduce capital expenditure by 20% in 2019, theoretically placing the future of many infrastructure projects in jeopardy. But Erdogan has always been big on infrastructure, lifting the curtain on multiple mega projects as a supposed demonstration of Turkey’s economic virility and, given the woebegone, recession-ridden state of so much of the country’s population right now and the Erdogan administration’s need to win back dispirited voters, how much extra bad news is the government truly prepared to countenance, how much stimuli is realistically in peril?

Albayrak’s reform package also includes promises to lower exemptions and reduce corporate tax, and to integrate the country’s severance pay fund with its private retirement insurance fund.

However, his presentation proved difficult to swallow given the number of key statistics which sat uncomfortably next to each other. For instance, Albayrak said the current ratio of non-performing loans stood at a quite good 4.2%. Analysts think the ratio could nearly double this year but Albayrak did not downgrade government expectations for 2.3% GDP growth this year, even while the IMF anticipates a contraction of 2.5%.

Another dollop of pressure
Back with Fidelity, and it was seeing much better risk-reward in Turkey’s external debt compared to local currency bonds. The planned capital injection will of course need to be funded by issuing more foreign debt, adding another dollop of pressure to the government’s balance sheet. There’s no doubt there were plenty of traders out there watching Albayrak’s appearance, looking to benefit from bold fixed income and volatility returns. Their appetite has been whetted of late.

Albayrak got over plenty of the short-term but he was quickly found wanting on the medium and the long. The minister, who was clearly aware his pledges and slides were rather on the light side when it came to detail, essentially told investors to look out for upcoming content updates from responsible ministries and said a separate package would be delivered in 2020.

For those who could not be at the presentation in person, the finance ministry shared Albayrak’s slides, nine in total including one cover and one back page.

Surrealist stance
Albayrak kept to what some critics have come to regard as his surrealist stance in fiscal and budget discipline while not hesitating to hold forth a little on judiciary reforms despite the current travails of Justice in the nation (HRW had something to say about that with a new report on hundreds of arrested lawyers released on April 10).

After Albayrak began to project his slides, the USD/TRY rate hit the 5.72s before easing back to the 5.68s. It is notable that the invisible hand in the market has again set an unofficial barrier. Not so long ago it was 5.40, but now it has been pushed out to 5.70. Again, the markets ask, can the central bank explain why it is bleeding reserves?

Before the finance minister had even got started, Gintaras Shlizhyus of Raiffeisen Research issued a morning note explaining some of the market indigestion: “[Turkish domestic government bonds] didn’t react much to the government’s plan to buy debt issued by state-owned banks in an attempt to boost domestic lending… Meanwhile AKP’s plan to request the rerun of municipal elections in Istanbul marks a growing divide in domestic politics. Turkish High Election Board so far rejected full recount of Istanbul vote and ordered only partial recount of fifty-one ballot boxes in twenty one Istanbul districts while it still needs to decide whether to cancel the election in the suburb district of Istanbul Buyukcekmece.

“Higher volatility to persist in the coming days with more pressure on TURKGB long-end but with 10y yields near 17% we expect the market to find temporary floor at current levels. TRY instability remains a huge risk factor to this scenario.”

When the government’s patent efforts since last November to suppress domestic bond rates are ignored, non-reacting teflon bond yields would definitely come as a surprise at the cost of avoiding the ongoing portfolio flows from Turkish government securities.

In further remarks, Albayrak hinted that the government was not planning to keep “zombie” companies alive anymore. The main question here is who will pay the foreign debts of the bankrupted private companies. The theoretical law is that the lender carries the default risk. However, the Erdogan government could keep its oh-so-handy tools in play, transferring the defaults to the public budget depending on deals to be done.

Returning to the new regulations to transfer Turkish employees’ severance pay funds to the mandatory pension funds system, analysts will recap how pension funds have been used to finance the government’s domestic debt issues as well as mortgage-backed securities issued via Turkish Development Bank (TKB).

Mandatory pension system regulations linked to severance pay rights are bad news for Turks who have TRY519mn of debts owed to lenders, including TRY416.2bn worth of outstanding loan debts and TRY102.8bn of credit card debts as of March 29. TRY20.1bn of overall personal bank debts were non-performing as of March 29.

Albayrak’s wide-ranging but shallow presentation also reiterated government plans to boost greenhouse vegetable production with the aim of containing any outbreaks of skyrocketing prices on the private market.

“Enough to stem dollarisation”
“Some headline positives from Albayrak in terms of reform agenda, but not much detail. All about delivery and detail to rebuild credibility and confidence. Did this prezzo assure locals enough to stem dollarisation?” Ash, of BlueBay wrote on Twitter, spreading more doubt as to whether Albayrak had done enough to give Turkey’s bedraggled economy a shot in the arm.

Expert analysis, of course, is all very well but to really gauge sentiment in Turkey just grab a quiet word with any down to earth Turk on Main Street. They’re not hanging about waiting for the economic geniuses who deliver Erdonomics to put on a new-fangled slideshow, for the USD/TRY rate is again hammering at the 5.70 ceiling and they know full well where it could go without the invisible hand.

Those Turks live under the Erdogan regime each second of their lives, and where profit-hungry foreign investors might take a punt via some fresh news flow or commentary said to point the way, they’re not unaware of Erdogan’s well-oiled PR plays—their dollars are not for sale.

Keep Erdogan’s PR trolls and the nauseatingly loyalist output of 90% or more of the Turkish media in mind, and perhaps head over to the Institute of International Finance (IIF) for some insights on where things are truly at. The IIF, as it happens, noted on April 9 in a research note that the current account deficits of Turkey and Argentina are set to shrink but that Turkey’s financing needs will remain high.

“Reserve levels are comfortable in most countries but buffers are limited in Turkey and South Africa… vulnerability remains particularly high in Turkey due to still large external amortization… The current account deficits of Turkey and Argentina will improve drastically in 2019 due to import compression… high private sector external debt will keep financing needs and vulnerability high, despite a large swing in the current account. On this metric, Argentina looks better than Turkey because the IMF program topped up international reserves…,” the IIF concluded.

The IIF forecasts that Turkey’s current account deficit will decline to $4.8bn in 2019 from $27.8bn in 2018. If that holds true, the GDP contraction this year would exceed the IIF forecast of 0.9% y/y. As this blog has been at pains to point out, something about those PowerPoint slides didn’t chime.