Turkey’s emerging market status may face downgrade

Turkey’s emerging market status may face downgrade
After wasting billions in defending the currency,Turkey may now lose its place in the key MSCI index. (Reuters)
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Updated 26 June 2020

Turkey’s emerging market status may face downgrade

Turkey’s emerging market status may face downgrade

ANKARA: Turkey’s main share index may be downgraded by a top international index compiler in what would be a blow to its already volatile financial markets.

MSCI, a prominent index provider, said it may lower the status of Turkey’s share index to a “frontier market” due to bans on short selling and stock lending since October 2019 and February 2020, respectively. That would mean the loss of major investment by international pension funds and other instituional investors that use MSCI indexes to deploy their capital. Frontier markets are seen to carry more investor risk.

“In the last 12 months, two important emerging markets, Argentina and Turkey, suffered substantial deterioration in market accessibility that could lead to their exclusion from the MSCI Emerging Markets Index,” said Dimitris Melas, global head of equity research and chairman of the MSCI Index Policy Committee.

Experts think that this new warning should be taken as a sign of the unease of foreign investment in the country as the government adopts ever stricter measures on the currency exchange.

Qatar’s recent move to increase its currency swap line with Turkey may have provided some relief, but analysts still see the potential need for further measures such as capital controls which would limit funds leaving the country.

Goldman Sachs said this boost from Qatar could only cover up to one third of Turkey’s foreign exchange funding gap this year.

In the meantime, the International Monetary Fund (IMF) on Thursday again reduced its economic forecasts for Turkey, with its GDP iforecast to drop by 5 percent this year.

But the country is resisting any assistance from the IMF for fear of “economically and politically surrendering” to foreign institutions despite its impending balance of payments crisis.

“The MSCI is issuing a warning to Turkey and would like it to reverse the restrictions imposed on short selling and stock lending. The Turkish authorities would be wise to heed this warning and ease these restrictions,” Nigel Rendell, director for Europe, the Middle East and Africa at New York-based Medley Global Advisers, told Arab News. “Turkey has been part and parcel of emerging markets’ portfolios for decades — through good times and bad; it’s absence would be greatly missed if it were to drop out of the MSCI EM index.

Rendell expressed concern at the speed at which the Turkish central bank has cut interest rates, which leaves the lira looking exposed given that inflation is still entrenched.

Turkey has $169 billion in foreign debt due in the next 12 months, while its gross foreign currency reserves stand only at $84 billion. Scarce foreign currency reserves are not going to save the day without much-needed summer tourism revenues that could be hit hard by COVID-19 pandemic. Last year the country generated $35 billion from foreign tourists, which is a distant dream this year.

“The possible demotion to “frontier” market by one of the world’s leading index providers show how futile and harmful is to fight a war against the market,” said Wolfango Piccoli, co-president of Teneo Intelligence in London.

“After wasting billions in defending the currency, Turkey may now lose its place in the key MSCI index. The possible reclassification as “frontier” market or standalone market would further intensify the ongoing outflow of capital from both Turkey’s equity and fixed income markets,” he said.

Earlier this month, Turkey’s Capital Markets Board decided to no longer allow investors to establish hedge funds that invest mainly in foreign-exchange assets, and it will begin taxing existing ones by 15 percent, in a bid to crack down on local demand for hard currency. In other terms, the government now taxes 15 percent of the revenues generated from investment funds that primarily invest in foreign bonds and foreign currencies in the country.

In a recent interview with Reuters, Turkey’s former economy czar Ali Babacan, who founded his own party to challenge the ruling Justice and Development Party (AKP), said Turkey must restore its economic credibility to secure necessary foreign funding and trigger growth.