Investor exodus tests Erdogan’s economic experiment

The Turkish President Recep Tayyip Erdogan said measures were needed to stabilize the economy and bolster belief in the lira. (Reuters)
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Updated 06 February 2020

Investor exodus tests Erdogan’s economic experiment

  • The World Bank estimates net foreign direct investment will not regain 2018 levels until after 2021

ISTANBUL: A run on the lira proved a pivotal moment for Turkey’s financial markets in 2018, prompting action from Ankara that has tilted the economy inward and frightened off foreign investors.

Turkish President Tayyip Erdogan, his government and his deputies have said the measures taken, which sparked an exodus of foreign money, were needed to stabilize the economy and bolster belief in the lira, which has dropped 36 percent in two years.

But the impact on investment in what was once a darling of emerging markets has been dramatic. The World Bank estimates that net foreign direct investment, which fell 30 percent last year, will not regain 2018 levels until after 2021.

For export-dependent Turkey, some analysts say that the danger is that this outflow could over time starve the Middle East’s top economy of funds and stall Erdogan’s recovery plans.

Former Turkish Treasury research associate Ugras Ulku, who now heads the Institute of International Finance’s (IIF) regional Emerging Markets research, said that “tighter control on financial markets, risks including US sanctions and Turkish borrowers’ inability to access foreign funding” mean the country may miss out on foreign cash.

Overseas investors have largely steered clear of Turkey’s sovereign bonds, despite a once-in-a-decade rally since May, while some players are reconsidering their strategies.

HSBC is considering selling its Turkish bank, sources familiar with the matter told Reuters last week, while Citigroup, one of the top foreign banks in Turkey, transferred at least two foreign exchange and rates traders to London from Istanbul last year due to the uncertainty, a source with knowledge of the move said.

Citi and HSBC both declined to comment.

The fallout has also led to losses for Goldman Sachs and other foreign firms who were burnt in 2019 when Turkey directed its banks to withhold liquidity from a key London swap market to defend the currency, two bankers familiar with trading activity said.

Goldman Sachs declined to comment.

The swap market move was one of dozens of dictats and regulations to defend the lira, from setting deposit rates at lenders to tapping the central bank’s reserves.

New rules and regulations spiked to 3,800 in 2018 from 551 in 2007, a World Bank analysis shows.

Interest rate cuts, along with a surge in public spending and a push to get state-owned banks to lend more, have helped Turkey to recover from recession. But a rapid uptick in lending in an already indebted economy and a widening budget deficit risk storing up trouble, ratings agencies and economists say.

Turkey’s Treasury and its central bank each declined to comment. Erdogan’s office was not available for comment.

A government effort to boost lending a year ago, by cutting the amount of interest Turkish savers could get from their deposit account, prompted some to keep their spare cash in dollars or euros, according to bankers and central bank data. State banks have since March tapped up to $32 billion of central bank reserves in buying up lira, a Reuters analysis of the central bank’s balance sheet shows.

The state banks then re-deposit lira at the central bank, officials and bankers with knowledge of this loop told Reuters.

An official at one state lender said Turkey’s banks are now staffed by traders at all hours, part of what some call a “national team” ready to respond to any lira weakness.

Despite this support, the lira skidded 11 percent last year, with the biggest slide between March and May, as interventions began.

Last year non-residents sold a net total of $3.3 billion in Turkish bonds, compared to purchases of $7 billion in 2017, IIF data shows. That means local investors mostly profited as Turkey’s benchmark 10-year yield dropped below 10 percent from 21 percent in May, thanks mostly to monetary easing and a drop in inflation.

The foreign flight is partly a response to the government’s approach to markets after a 2017 referendum handed Erdogan wide-ranging authority over the courts, military and economy.

The clearest signal of an intensification of this intervention came days before nationwide local elections in March 2019 that would deal a blow to Erdogan’s party, more than a dozen investors, bankers and Turkish officials told Reuters.

That was when Turkish state lenders suddenly cut short-term lira funding to the London swap market, which was popular for hedging and shorting, traders and bankers said, sending rates rocketing to 1,200 percent.

The move reversed a volatile drop in the currency, but left big European and US banks scrambling to cover positions and sell Turkish bonds, several sources have told Reuters.

Goldman Sachs was among the hardest hit, two of them said.

Diversity and sustainability top Riyadh conference agenda

Updated 44 min 5 sec ago

Diversity and sustainability top Riyadh conference agenda

  • Saudi British Bank chair Lubna Olayan expects global GDP growth to be driven by emerging economies

RIYADH: Sustainability, renewable energy and the role of women in the economy were on the agenda at the Asia House Middle East Trade Dialogue conference in Riyadh on Tuesday.

In her opening remarks, Lubna Olayan, chair of the Saudi British Bank, which is sponsoring the event, said: “We are standing at a fork in the road of global trade.”

“There were regions or communities that were left behind in the global race for prosperity,” she said, but added: “Domestic demand is growing and it is easier to meet the demand locally.”

There was a global pivot toward emerging markets and China in particular, she said. “The growth of GDP will come from emerging markets.”

Joining the conference from Beijing via Skype was Victor Gao, vice president of the Center for China and Globalization, who said: “China right now is undergoing this epic struggle, coronavirus, and even though we are not out of the woods, the situation is getting much better.”

He discussed the trade war between China and the US, saying that it was “mutually destructive” but “started by the US.”

However, Gao added: “Both the US and China really need to get their act together and put the war behind us.”

One of the panel discussions emphasized the importance of having a diverse workplace that included women. “We are seeing change, but the entertainment sector is pretty much still male-dominated,” said Debbie Stanford-Kristiansen, the first female CEO in the entertainment industry in the Middle East.

We are standing at a fork in the road of global trade.

Lubna Al-Olayan

“It’s not about men vs women but it’s about creating diversity. It’s about having the right person in the right role, whether male or female, and creating a balance,” Stanford-Kristiansen said.

Ghada Al-Jarbou, general manager of global liquidity and cash management at Saudi British Bank, said: “What I’d like to see personally are more women in STEM jobs. Under Vision 2030, lots of fields have opened for women that were previously off limits. We want to see more of that and, in the end, it increases the GDP.”

Khaled Al-Dhaher, country managing director of Accenture Saudi Arabia, said: “It starts with leadership, in creating a diverse and inclusive environment. It’s important to drive targets, it’s about bringing value. When there are teams with diverse leaderships, everyone wins. It creates a better environment for everyone.”

Sylvain Cote, senior economist at Saudi Aramco, said: “Oil will remain an important source of energy for at least the next 20 years. We haven’t seen a source of energy replaced by another one, they tend to build on one another. It doesn’t look like it will disappear.”

Lord Green, Asia House chairman, delivered the closing statement, remarking that he had lived in Saudi Arabia for a year in 1978 and loved it. “Riyadh left it’s imprint on me,” he said, adding that it had changed a great deal.

“The city (Riyadh) is 10 times bigger, has the most dramatic architecture in the world, income per head has at least doubled,” he said.