As the March 12 coronavirus carnage on world markets mounted up and brought about unprecedented levels of perspiration on trading floors, Iran was heading to the IMF for the first time since the 1960s but the Turkish Treasury was busy selling €1.26bn of euro-denominated domestic bonds and lease certificates due March 2021 to local lenders via direct sale. Turkey’s finance ministry confirmed the sale in a written statement.
The papers will semi-annually pay 0.75% coupons.
Turkey, of course, is not long off the canvas. Its economic troubles of the past two years nearly had it out for the count in 2018, so to be hit by what is looking like ‘Global Financial Crisis II’ before it is once more steady on its feet is a grievous blow. Of course, as related by bne IntelliNews ad infinitum, the Erdogan administration has not at all made an honest stab at establishing good economic health; it’s rather relied on orchestrating short-termist strategies in attempting to deliver cheap money, sugar highs that might refloat its fortunes with the distressed electorate. That means Turkey is in an even more perilous position in the face of this global meltdown than it might have been. But you can expect to see strongman president Recep Tayyip Erdogan’s minions continue trying to pull out all the dodgy stops to convince people they have it all under control.
Rehashed swap rules
Last month, the central bank rehashed the swap rules to support its FX reserves by allowing local banks to lend more hard currency to the national lender in exchange for Turkish lira (TRY).
State banks tapped around $30bn in 2019 and $7bn in January of central bank reserves in buying up lira, a Reuters analysis of the central bank’s balance sheet showed last month.
Turkey’s financial markets, meanwhile, have been subject to undeclared state interventions since last August. The equity market has been under an unofficial suspension since last year, with short-selling bans introduced. The London lira swap market has become near-idle.
In January, Turkey’s finance minister and the central bank governor confirmed that state banks were active in the FX market. They also unwisely talked about the level of the exchange rate that was tolerable, breaching a golden rule.
Browbeaten Turks can’t rid themselves of the jitters. Wondering where all this is going, they’ve been flocking to the dollar, smashing records for foreign currency deposits. A new record high of $201.7bn for such deposits and funds, including precious metals, held by Turkish individuals and corporates by March 6, up from $199.74bn a week earlier, was announced by the central bank on March 12.
From volatile foreign policy to polarising, poisoned politics at home to botched macroeconomic management, Turkey has grown heartily sick of the word “crisis” in the past several years, but it is not a word that the country can afford to ignore—and now, as Turks sigh and exclaim “Won’t the woes just stop for a day!”, “The COVID-19 Sudden Stop”—as described in an Institute of International Finance (IIF) release—rears its disastrously ugly head. Will it end up the emperor of all catastrophes piled on debilitating dilemmas such as global warming and the wretched rise of foul-mouthed populism?
Turkey, you might hear, is not doing well for ammo. It unleashed massive stimulus to recover from the 2018 currency crisis and subsequent recession yet now it must somehow stretch its central bank and public finances to defend the exposed economy and pandemic-threatened tourism sector (Turkey might well be claiming just one confirmed COVID-19 case, but anyone intent on trusting official data in the country and rushing to book a holiday there needs their head examined). As Reuters commented in March 12 article, “Coronavirus could mean back-to-back shocks for Turkey”.
Turkey is the world’s sixth-largest tourist destination and the sector accounts for around 12% of GDP.
On March 12, the USD/TRY rate climbed to more than 6.30, ominously sailing through levels last familiar during the August 2018 lira crash, while 5-year credit default swaps (CDS) for Turkey were at 500bp+. The all-time high of 566bp was seen in September 2018 after the currency crunch.
Sovereign eurobonds as well as corporate bonds nosedived across the curve.
The Borsa Istanbul’s benchmark BIST-100 tested the 92,000s. The index saw its historical high of 124,537 on January 22. It finished March 11 licking its wounds at 93,639, down 7.26% on the day.
The IIF said in its release: “We worry a global ‘sudden stop’ in financing is beginning to emerge, with COVID-19 the underlying driver. Monetary and fiscal easing measures are a welcome palliative, but in the end only a concerted response in terms of testing and containment will be able to mitigate the ‘fear factor’ in markets and jump-start global demand. Our high-frequency tracking of non-resident portfolio flows to EM is a useful gauge of risk appetite and points to a large ‘sudden stop’ on that front as well.”
It added: “Turkey and Argentina showed in 2018 just how negative ‘sudden stops’ can be for economic activity, with the reversal in foreign financing leading to a shut-down in investment from which both countries have yet to recover. We worry that the unfolding ‘sudden stop’ now has a similar potential, just on a more global and systemic level.”
Global Capital reported on March 11 in a story entitled “EM vulnerability under scrutiny as primary markets shut”: “In the event of huge emerging market bond fund outflows, as some have predicted for this week, the new issue market may be shut for longer than many bankers and investors were anticipating even a fortnight ago. Now, attention is turning to which countries will struggle if external markets are shut or funding becomes more expensive.”
Even the globally coordinated fiscal and monetary response appears to have not impressed traders, Bloomberg reported in a March 11 story entitled “Trump sell-off shows rising fear governments can’t save markets”.
“One of the key problems that financial markets have with the current set of economic challenges is the perceived shortcomings of prototypical policy responses” in the case of the virus, Morgan Stanley strategists led by Michael Zezas wrote in a note on March 11.
“The collapse in oil prices will reduce current high rates of inflation in Central Europe and provide some respite for those oil importers with more fragile external positions (Turkey, Romania and Ukraine). However, it will do little to cushion the blow to overall GDP growth from the effects of the coronavirus,” Liam Peach of Capital Economics said on March 12 in a research note.
Feeling the pain
On March 12, Sinan Oncel, head of the United Brands Association (BMD), warned during his opening speech for the Brand Exports Summit 2020 that Turkish brands may feel the pain if the pandemic substantially spreads.
Turkish brand exports rose in the first two months of 2020 due to orders shifted from COVID-19- paralysed Chinese plants but troubles in sourcing raw materials and in final goods transport, as well as the upcoming collapse in tourist numbers, may hit the sector.
Oncel said that according to data from the Interbank Card Centre (BKM), the value of foreign credit card transactions in Turkey amounted to TRY82bn in 2019, equivalent to around 10% of total credit card transactions.
BMD represents around 400 brands active in organised retail with approximately 70,000 domestic stores as well as around 5,000 stores in 125 foreign countries.
Italy, on full COVID-19 lockdown, is Turkey’s third largest export market ($9.3bn or 5.4% of total exports in 2019) and fifth largest import market ($8.6bn or 4.2% of the total in 2019).
Automotive goods, staple and subindustry goods, textiles and steel and byproducts spearhead Turkish exports to Italy, while machinery, electronic devices, means of transport, metals and chemical goods lead in Italian exports to Turkey.
“It is the third-largest export market for the Turkish automotive sector. ... We make more than 15% of our total exports for Italy… If Italy solves this by April 3, our automotive industry will manage this situation somewhat. But if it extends until mid-April, there may be a problem,” head of the Uludag Automotive Industry Exporters' Association (OIB), Barac Celik, told daily Sabah on March 11.
“Orders of Turkish companies doing business with Italy were already down 50-60%, head of the Mediterranean Exporters' Associations, Hayri Ugur, said.
“There is no solution suggestion for now. Have to wait. The wait could last until at least June and then the assessments will be made depending on the situation,” he added.
Concerns persist that the same situation could also be experienced with other countries as well, Ugur also noted.
“Lastly, the [Spain-headquartered international clothing company] Inditex Group has decided not to accept any manufacturer in its office. Also, company officials that were expected to arrive next week postponed their trips to the end of May,” he added.
“Now many of our customers in Italy had to cancel their orders. We have companies that have their products ready but cannot load due to this reason. On the other hand, Italy is a country where we import intermediate goods in some product groups. It's too early to see the whole picture,” Burak Onder, head of the Turkish Home and Kitchenware Industrialists and Exporters Associations, told Dunya.
“Cut like with a knife”
“Orders in Italy were cut like with a knife. Previously given orders are also pending,” head of Istanbul Leather and Leather Products Exporters Association (IDMIB), Mustafa Senocak was quoted by Dunya as saying on March 11.
“Leather-related fairs were held in Italy, and we attended and received orders. Now, the companies that placed these orders say that they do not want them because they cannot open their stores,” he added.
Highway transport and roll-on, roll-off, or Ro-Ro, transport with Italy continues; however, transportation companies are concerned that the borders will be completely shut down, Sabah also reported.
Turkey’s closure of its only border crossing with Iraq amid a spike in coronavirus cases in its southern neighbour has disabled a major trade route, threatening the livelihoods of millions of people, from street vendors at the crossing to big industries on the other side of the country, Al-Monitor has reported.
The Habur crossing, which opens into Iraqi Kurdistan, was sealed off on March 1, a week after Turkey closed its border with its eastern neighbour Iran.
Turkey’s exports in 2019 to Iraq stood at $9bn, marking a 5.2% share. Iraq is the fourth largest export market for Turkey.