EMTA Forum in Istanbul - Sept. 19

We regret that this event is not open to the media.  

EMTA Holds First Seminar in Istanbul During Height of Turkish Crisis

In the midst of concern over Turkey’s economy, EMTA’s first Forum in Istanbul attracted a standing-room-only crowd, representing both the local and international EM community. While hearing expert analysis of Turkish prospects, the 250 attendees also participated in a series of electronic insta-polls on key economic variables. (EMTA Members may access the results of these polls by CLICKING HERE). The event was held on Wednesday, September 19, 2018 and was sponsored by VakifBank. Additional support was provided by Goldman Sachs, Nomura, Osmanli Securities and Societe Generale.

At the outset of leading the event’s Sell-side panel, Mustafa Turan (VakifBank) conducted the first poll of market sentiment. 56% of attendees predicted that Turkish CPI would run between 18 and 25% in the next twelve months, while a plurality (45%) expected GDP to be flat to a 5% contraction in 2019. A plurality (33%) also saw the lira trading at between 6 and 7 per USD in twelve months, just edging out the 31% of attendees who predicted a weaker lira of 7 to 8 per dollar. 61% of attendees expected ad hoc, but not systemic, corporate defaults, with 64% predicting that there would be no widespread banking failure. Finally, a plurality of 46% anticipated a current account deficit to GDP ratio of 0 to 3% in 2019.

Responding to the insta-poll results, Inan Demir (Nomura) expressed surprise about the results showing accelerated inflation; “this just shows how difficult the Central Bank’s job is, suggesting more entrenched expectations on inflation.” He noted his own personal view was in a lower 12 to 18% range, while observing the more pessimistic results may suggest a need for further CBT rate hikes. Demir offered his own views of a 2% contraction in GDP growth, and the lira trading between 7 and 8 per dollar.

“12 to 18% inflation is possible if things stabilize, but we are now a double-digit inflation country,” declared Global Source’s Murat Ucer. For Ucer, it remained unclear if Turkey could reverse its downwards course on its own, or if an IMF program was needed. “If we stay on our own, things might get worse before they get better, and our audience poll may prove correct,” he stated.

Olgay Buyukkayali, from Goldman Sachs Securities Division, noted indications of slowing growth and weaker domestic demand. The current account deficit is narrowing, with different views in the market on the capital account side of the balance of payments. He observed that, by almost any metric, the lira appeared to be cheap, while warning that inflation had to be considered.
Kit Juckes (Societe Generale) expressed confidence that the lira will be stronger in a year’s time, “but we will see how much weaker it gets first.” Following the unexpected CBT rate hike and awaiting the Finance Minister’s economic plans to be unveiled the following day, Juckes pondered if this was “Day One” of the rebound. He noted prior to the CBT hike 8 had been bandied about as a possible new fx rate; “it’s too soon to be super-confident,” although money would be made for those who correctly guessed the nadir.
Turan asked panelists to review global sentiment towards EM generally. “It’s winter for countries who borrow a lot of money right now,” summarized Juckes. After a decade of global liquidity, rising DM rates have led to some EM outflows, he added. Ucer concurred that global macro conditions would be less supportive of EM investments than in the past; Turkey needed to distance itself from “the real basket cases…decouple from the bottom….and be linked instead to countries like South Korea.” Rolling over upcoming debt would be a critical first step. Demir expressed hope that the new economic program would be a first step in decoupling from other struggling EM sovereigns.

Buyukkayali concurred with the audience poll result that a systemic issue was unlikely in the corporate and banking sector. In Ucer’s view, “we cannot all play ostrich…there is definitely a problem in the corporate sector…but we don’t have a systemic problem, it can be solved.” A V-shaped recovery as in the past was possible, but L- or U-shaped patterns were as well. Demir cautioned against the creation of “zombie” companies. Finally, Juckes asserted that Turkish banks were currently in better shape than DM banks in 2008.
AllianceBernstein’s Okan Akin moderated the event’s Buy-side panel. Akin began by asking attendees to cast their vote on the cause of the recent Turkish assets sell-off, with 45% attributing it to domestic political forces. Brett Diment (Aberdeen Standard Investments) argued that the lira’s decline of 40% was idiosyncratic, and not simply a result of general EM malaise. John Carlson (Fidelity Investment Management) expressed his own personal view that weak monetary policy, i.e. “the Central Bank being behind the curve for so long,” was to blame. BlueBay Asset Management’s Tim Ash concurred in attributing outflows to “disappointing monetary policy,” while believing that geopolitics had played a role as well.

Akin’s second poll for attendees asked them to decide the most pressing issue for Turkey, with 45% citing debt levels. Kaan Nazli (Neuberger Berman) expressed sympathy for that result, but reasoned that Central Bank credibility was slightly more important, “as once we know Central Bank policy, we can solve private sector issues.” Diment argued that EU/US relations were paramount, stating that a cheap lira would correct the current account deficit. “The issues with the jailed pastor, the missile system dispute and Iran are all factors which impact domestic confidence, and the imposition of sanctions could potentially knock things off course,” he stated. Carlson seconded the importance of Central Bank credibility.

Panelists agreed with the overwhelming majority (70%) that saw geopolitics as Turkey’s most pressing global issue. Carlson spoke pessimistically about any rapprochement between the EU/US and Turkey; in his view, “relations won’t improve anytime soon.” He cited Samuel Huntington’s “Clash of Civilizations” in suggesting that Turkey, having been “played” by the carrot of EU expansion and the complications of the Gulf War, might move towards the East, a point rebuffed by Ash (“Qatar has come up with some money, but Putin has not written any checks….and most of Turkey’s trade is with the EU”). Akin asserted that, for Turks such as himself, the outcome need not be seen as binary. “We buy energy from Russia and sell them agricultural products, and we trade with the EU and get tourism…we don’t need to choose.” Nazli saw potential opportunities for Turkish businesses in Syria’s eventual reconstruction, while warning that any possible sanctions on Turkey would add “significant” uncertainty to local businesses.

Only Ash disagreed with the next insta-poll result, which found that 49% of attendees could not foresee any Turkish IMF deal while the AKP was in power. “President Erdogan is an incredibly pragmatic person; if he was pushed up against a wall, he would do what he needed to do--look at the Central Bank hike,” he stated. Diment predicted that financial assistance from the EU was more likely than IMF funding, while Nazli declared that an IMF deal would “never, ever” happen under Erdogan.

Commentary was also provided on the last insta-poll audience question, which found an audience equally divided between whether Turkey’s relationship with the US would improve or whether it would deteriorate. Carlson believed that US-Turkish relations would reach the point of Turkey leaving NATO. Nazli argued that Ankara expected more co-operation from the US than the “disappointing response to the 2016 coup” and didn’t see improvement. In contrast, Ash believed that, despite current tension, pragmatism would prevail, citing as an example the President’s trip to Germany. Diment also expressed “cautious” optimism, concurring with Ash that a deal on the Brunson affair was likely.

The panel concluded with speakers assessing the outlook for Turkey. Ash saw signs that rebalancing was occurring, and praised the CBT hike, while urging the country to “deliver now.” Carlson was “very confident that Turkey will do the right thing…and I’m almost certain Turkey can restore confidence.” Diment stressed that economic officials need to enter an on-going relationship with investors, with the first step being a successful economic plan presented.