Turkey Country Report Feb22 - February, 2022

February 10, 2022

The outlook for Turkey in 2022 promises increasing tensions that lead ineluctably to bloody violence. No outcomes will be a surprise in a country now ridden by multiple crises.

How to name Turkey’s crisis? Balance of payments crisis? Energy crisis? Lira crisis? Governance Crisis? Turkey cut natural gas flows (by 40% starting from January 20) and electricity provision (for rolling periods of three days starting from January 24) at industrial production plants.

On January 28, Turkey’s energy ministry said that the electricity cuts were to end on January 29 and the gas cuts would decline to 20% starting from January 31. On February 7, Botas said gas flow would be fully restored as of February 8.

Such a major energy shortfall is a first for Turkey. The situation outdoes what was seen during the balance of payments crisis the country suffered at the end of the 1970s. The next stop looking back for such negative milestones is the first half of the 1940s during World War II, when bread in Turkey was rationed.

Turkey entered the process that has taken the country to the point of a full-blown collapse on all fronts in July 2016 with the failed coup attempt. The reality includes a financial and economic depression. The situation has got steadily worse for six years.

Turkey entered three-digit inflation territory in January.

USD/TRY: Latest all-time high rate - the 18.3674 recorded on December 20.

On the evening of December 20, the Erdogan regime staged a new lira rescue “movie”. Since then, the USD/TRY rate has stayed below the 14-level, while the regime has again been burning wildly through the reserves.

Turkey’s currency regime is an undeclared managed, or “dirty”, float. There are not too many usable reserves with which to intervene. Recently, there have been some more “unidentified” FX inflows.

Capital controls? Never. The Erdogan regime would never lower itself to capital controls, it is always committed to free market principles. Exporters are now obliged to sell 25% of their export revenues to the central bank (This supports the reserves, but the trade balance is in deficit. When the energy cuts are added to the FX shortages in intermediary goods imports, the economy has almost stopped). Banks must hit a 10% FX account to lira account conversion rate by April 15 to avoid paying a 1.5% commission that will be imposed on FX required reserves.

Turkey’s 5-year credit default swaps (CDS) surpassed the 600-level prior to December 20 and the indicator has been hovering in the 500s since then. Turkey’s CDS are a popular instrument with which to trade Turkey risk without being subject to capital control shocks or short sale bans/fines.

The currency tension will not go away. New records will arrive until President Recep Tayyip Erdogan changes his mind on keeping the policy rate below inflation in a high inflation environment.

Foreign companies’ interest in Turkish manufacturers was on the rise. However, the expected boom has not materialised. The latest energy crisis may scare off buyers in the coming period. The main theme in recent M&As in Turkey has centred on foreign buyers taking over the debt of indebted manufacturing companies (See Section 5.3).

A eurobond auction is awaited from the Turkish Treasury. On February 7, Bloomberg quoted unnamed sources as saying that the Treasury has mandated banks, including HSBC (London/HSBA), to sell sukuk papers. The authority is late with the auction. If it cannot sell eurobonds in January, it typically moves to do so in February. In recent years, the Treasury has not waited until as late as March to hold its first auction of the year.

On February 21, the Treasury will redeem $2bn of sukuk papers. See the full list of redemptions under Section 7.5.

Coca-Cola (CCOLA) Icecek sold $500mn of 7-year eurobonds at a 4.50% coupon. It also bought back $199mn of its outstanding $500mn paper, which pay a 4.215% coupon, due September 24.

Botas signed a 4-year deal for 5.75bn m3/year of gas from Gazprom (Moscow/GAZP). On January 26, media reports suggested that Socar Turkey will buy daily 4mn m3 of gas from Azerbaijan.

BlackRock (New York/BLK) has invested in Dream Games. “An abundance of cash in the money market due to the pandemic has also reflected positively upon gaming investments.”

In 2021, Trendyol, Getir, Dream Games, Tiko, Colendi, Libra Softworks, Picus Security, BluTV, Akinon, Servislet and RS Research were top fundraisers in Turkey. See the full list of leading tech deals here.

Modanisa, Insider, Good Job Games, Fugo Games, Alictus, Vivense, Meditopia, Marti, Paycore and Ace Games are seen as upcoming Turkish unicorns.

Q4 financials season at Borsa Istanbul: Deadlines - March 1 for unconsolidated, March 11 for consolidated and banks.

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