Turkish lira in freefall: What triggered the sharp decline?

Turkish lira in freefall: What triggered the sharp decline?
A merchant counts Turkish lira banknotes at the Grand Bazaar in Istanbul, Turkey, March 29, 2019. (Reuters)
Short Url
Updated 08 August 2020

Turkish lira in freefall: What triggered the sharp decline?

Turkish lira in freefall: What triggered the sharp decline?
  • While dollar/lira parity was just 1.31 in 2008 and 2.83 in 2016, it reached 7.31 on Friday morning, passing beyond the psychological threshold
  • According to experts, Turkey has already run out of ammunition for defending the lira, apart from buying gold to diversify its portfolio

ANKARA: On Thursday, two years after the historic currency crisis of August 2018, the Turkish lira hit a new record low against the US dollar and the euro despite the months-long failed interventions of state banks and Turkey’s Central Bank (CBRT) to prop up the currency and keep it pegged.

While dollar/lira parity was just 1.31 in 2008 and 2.83 in 2016, it now reached 7.31 on Friday morning, passing beyond the psychological threshold.

The CBRT announced that it is set to use “all available instruments to reduce the excessive volatility in the markets.”

According to experts, Turkey has already run out of ammunition for defending the lira, apart from buying gold to diversify its portfolio.

Last month, the CBRT overtook Russia as the world’s largest purchaser of gold. Turkey’s annual inflation reached about 12 percent according to the official figures.

Erinc Yeldan, an economy professor at Ankara Bilkent University, said that financial investors were leaving the Turkish market after seeing that the CBRT’s reserves reportedly went negative for a couple of weeks.

“They now believe that the king is naked,” he told Arab News, adding that the sharp currency fluctuations might have already benefited some rent-seeking pro-government companies in saving dollars and paying their debts.

For Yeldan, however, such a fixed exchange rate system is like a ship without a rudder — simply unsustainable.

“The reconversion of the Hagia Sophia museum into a mosque despite international warning and the newly adopted restrictions in social media law have been all political operations to divert attention from the economic challenges in the country,” he said.

Regarding macro fundamentals, Nikolay Markov, senior economist at Pictet Asset Management, thinks that Turkey is highly vulnerable given its strong reliance on foreign capital flows to finance its chronic current account deficit.

“Within the Emerging Markets’ space, it is currently the country most at risk after Argentina,” he told Arab News. 

According to Markov, the recently renewed depreciation of the lira reflects investors’ growing concerns about a likely balance of payments crisis, the lack of appropriate economic policy measures and, lately, somewhat higher geopolitical risks.

“The significant decline of the CBRT’s foreign currency reserves due to higher currency market interventions is clearly a trigger, as is the lack of decisive monetary policy actions. To contain the lira depreciation, the CBRT should sharply hike rates now to show its decisiveness and restore investors’ confidence,” he told Arab News.

Pictet Asset Management suggests that the key policy rate should be set now at 14 percent instead of remaining unchanged at 8.25 percent.

Markov also noted that the current depreciation of the lira is not sustainable for a long period given that the CBRT has already lost a sizable part of its reserves and that this has not been helpful in restoring investors’ confidence.

“This actually generates expectations of future CBRT foreign currency interventions, in which case the endgame is for its reserves to be completely depleted,” he said.

For Markov, the best remedy in the short term would be to hike rates aggressively but only for a short period of time to contain the negative impact on domestic demand, which is already largely impacted by the pandemic shock; to reverse the lira depreciation trend; and to restore investors’ confidence and, as a consequence, receive foreign capital inflows into the country.

Nigel Rendell, a senior analyst at Medley Global Advisers in London, thinks that the pattern in the Turkish lira reflects a lack of credibility over economic policy.

“The CBRT is attempting to meet a number of mutually exclusive policy objectives: maintain low interest rates, reduce inflation, promote economic growth and keep the lira broadly stable. Intervening in the foreign exchange (FX) market to try and support the currency and using ‘borrowed’ money from the commercial banks and overseas sources is not sustainable,” he told Arab News.

Rendell noted that many investors began to question the wisdom of the CBRT’s actions when the lira even managed to lose ground against a weakening dollar and concluded that the CBRT was throwing good money after bad to try and keep the lira at an artificial level.

“The problem now is that a weaker currency will quickly feed into higher inflation and threatens to leave the current policy rate looking even further out of line at 8.25 percent. The case for hiking official interest rates is hindered by political constraints,” he said.

“President Erdogan believes in ‘voodoo economics,’ bizarrely arguing that higher interest rates somehow lead to higher inflation,” Rendell said.

Last year, the head of the CBRT was dismissed in an overnight presidential decree over his disagreements with President Erdogan in keeping monetary policy tight.

“So, a rate hike now, at a time when the government is desperate to underwrite the real economy, would be met with political fury. Doubtless, the current CBRT Governor Murat Uysal fears for his job,” Rendell said.

Despite the sharp decline and lira meltdown, the Turkish government still opposes increasing interest rates to prevent a deeper crisis, rejecting the claims that the CBRT’s FX reserves are depleted.

However, according to the official data, the bank’s gross FX reserves decreased from $81 billion to $51 billion this year following the moves to stabilize the currency.

News agency Reuters claimed that the CBRT and state lenders have sold about $110 billion since early last year to fix the lira.

Rendell thinks that, ideally, interest rates should be raised by a couple of hundred basis points, but this looks very unlikely until all other options — like changes in reserve requirements and moderating credit growth further — have been tried, exhausted and inevitably found to have failed.

Sergey Dergachev, senior portfolio manager at Union Investment, believes that the geopolitical challenges in Turkey have been also influential over the free fall and selloff of the Turkish lira over recent days.

“There are still open conflicts with Greece and Libya. Turkey is closely following the Azerbaijan-Armenia conflict, and the situation in Syria is also ongoing. And there are still various open political hotspots between the US and Turkey, like the Russian S-400 missile system and the state-run Halkbank trial,” he told Arab News. 

Dergachev thinks that what investors need would be some signals from the CBRT to calm down markets, maybe by gradually signaling some reversion to a more orthodox monetary policy mix.

“The option to combat this situation with a one-off huge rate hike is there, but political resistance for this ‘ultima ratio step’ is there as well. I do not think that this will calm the situation down fully. Should a rate hike happen, there will be some short-term relief for the Turkish lira and Turkish assets, but investors are looking for more stabilizing macroeconomic and monetary policy-related steps to reduce volatility,” he said.


Saudi Arabia co-chairs meeting on restructuring Chad’s debts

Saudi Arabia co-chairs meeting on restructuring Chad’s debts
Updated 16 June 2021

Saudi Arabia co-chairs meeting on restructuring Chad’s debts

Saudi Arabia co-chairs meeting on restructuring Chad’s debts
  • Chad is the first country to request the restructuring under the new Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative

RIYADH: Saudi Arabia has co-chaired the fourth creditor committee meeting to help Chad restructure its debts under a new G20 framework.

The African state requested the restructuring in January as it struggled with a high debt burden exacerbated by the coronavirus disease (COVID-19) pandemic.

Chad is the first country to request the restructuring under the new Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative. The framework was agreed in November by the G20 under Saudi Arabia’s presidency and the committee held its first meeting in April this year.

Saudi Arabia co-chaired the June 10 virtual meeting with France. The other committee members also included China and India, while representatives from the International Monetary Fund (IMF) were also present as observers.

“The creditor committee supports Chad’s envisaged IMF upper credit tranche program and its swift adoption by the IMF Executive Board to address Chad’s urgent financing needs. The creditor committee encourages Multilateral Development Banks to maximize their support for Chad to meet its long-term financial needs,” the committee said in a press statement.

The statement added that committee members “are committed” to negotiate with Chad to restructure its debts.

The committee highlighted that it was important that private sector creditors be offered “debt treatments on terms at least as favorable as those being considered by the creditor committee, in line with the comparability of treatment principle.”

The IMF in January completed initial talks with Chad on a new medium-term financing program worth about $560 million. According to the IMF, Chad’s total debt amounted to $2.8 billion, or 25.6 percent of gross domestic product (GDP), at the end of 2019. China is its largest official bilateral creditor, according to a report by Reuters.


Mubadala to invest $100m in a Chinese on-demand trucking startup before IPO

Mubadala to invest $100m in a Chinese on-demand trucking startup before IPO
Updated 16 June 2021

Mubadala to invest $100m in a Chinese on-demand trucking startup before IPO

Mubadala to invest $100m in a Chinese on-demand trucking startup before IPO
  • Mubadala to take part in private placements before IPO
  • Ontario Teachers’ Pension Plan Board also investing $100 million

NEW YORK: UAE sovereign investment vehicle Mubadala plans to invest $100 million in Full Truck Alliance Co., a Chinese trucking startup that styles itself as “Uber for trucks,” Bloomberg reported.
Full Truck Alliance (FTA) said on Tuesday it is aiming for a valuation of over $20 billion in its US initial public offering, marking another high-profile Chinese stock market listing in New York this year.
This coincides with a private placement in which the Ontario Teachers’ Pension Plan Board and Mubadala will each purchase $100 million worth of Class A ordinary shares, Bloomberg said.
FTA, more popularly referred to as Manbang in China, said it is offering 82.5 million American Depositary Shares (ADS) at between $17 and $19 per ADS. Each ADS represents 20 Class A ordinary shares.
At the top end of the price range, FTA could raise as much as $1.57 billion from the IPO,which would make it the largest US listing for a Chinese company this year, according to data provider Refinitiv. Chinese vaping firm RLX Technology Inc. raised $1.4 billion in its US IPO in January.
Those figures are expected to be dwarfed in the coming weeks when China’s largest ride-hailing company Didi Chuxing launches its IPO, which is expected to be the biggest share sale of the year. Reuters has previously reported that Didi could raise as much as $10 billion from its stock market flotation.
A spate of richly valued Chinese tech startups have targeted IPOs in the US in recent years, as they can tap into the deepest capital pool in the world and avoid tighter regulatory scrutiny in major Asian exchanges like Hong Kong.
Last year, Chinese companies raised $12 billion from US listings, nearly triple the amount raised in 2019, according to Refinitiv data. This year is expected to comfortably surpass last year’s tally.
Chinese companies have so far raised $5.82 billion in the United States this year, according to Refinitiv data.
FTA, formed out of a merger in 2017 between two digital freight platforms, Yunmanman and Huochebang, is led by former Alibaba executive Peter Hui Zhang.
The company runs a mobile app that connects truck drivers to people that need to ship items within China. It was the world’s largest digital-freight platform by gross transaction value last year, according to research from China Insights Consultancy that was commissioned by the company.
In November, FTA was valued at nearly $12 billion after a $1.7 billion investment, Reuters reported. That investment round was led by Japanese conglomerate SoftBank’s Vision Fund, Sequoia Capital, Permira Capital and Fidelity.
China’s tech giant Tencent Holdings Ltd. is also one of the company’s backers.
Morgan Stanley, CICC and Goldman Sachs are among the underwriters for FTA’s offering in New York. The company plans to list on the New York Stock Exchange under the symbol “YMM.”


Saudi Arabia dominates slow MENA IPO market in Q1

Saudi Arabia dominates slow MENA IPO market in Q1
Updated 16 June 2021

Saudi Arabia dominates slow MENA IPO market in Q1

Saudi Arabia dominates slow MENA IPO market in Q1
  • MENA IPOs lagged the global market in Q1, which was the best first quarter in terms of both deal numbers and proceeds for the 20 years

DUBAI: Saudi Arabian companies accounted for two of the three initial public offerings in the Middle East and North Africa region during the first quarter of 2021, representing 96 percent of the amount raised, according to consultancy EY.
The two listings on the Tadawul in Q1 raised $281.6 million. That compares with $1.45 billion from four listings for the whole of 2020, which represented a 78 percent share of the MENA IPO market, EY said in a report.
Alkhorayef Water & Power Technologies raised $144 million after its retail offering was oversubscribed by 1,511 percent and the institutional offering by 6,320 percent. Theeb Rent a Car Company collected $138 million from its IPO, which was oversubscribed by 6,010 percent for the institutional tranche and 3,385 percent for the retail offering.
MENA IPOs lagged the global market in Q1, which was the best first quarter in terms of both deal numbers and proceeds for the 20 years, generating $105.6 billion from 430 offerings, EY said. MENA IPOs raised $294.8 million, a 64 percent decline from the same period in 2020 and down from $925 million Q4, 2020.
“The MENA region’s IPO market was off to a slower than expected start in 2021, despite expectations for an increase in IPO activity after an uptick and stronger performance in Q4 of 2020,” said Matthew Benson, EY MENA strategy and transactions leader. “We expect IPO activity to bounce back over the coming months while economic conditions in the region continue to improve, aided by the accelerated vaccine rollouts and the possibility of reaching herd immunity against COVID-19.”


Aramco’s entrepreneurship arm launches $27m roadshow to find KSA’s next big startups

Aramco’s entrepreneurship arm launches $27m roadshow to find KSA’s next big startups
Updated 16 June 2021

Aramco’s entrepreneurship arm launches $27m roadshow to find KSA’s next big startups

Aramco’s entrepreneurship arm launches $27m roadshow to find KSA’s next big startups
  • Wa’ed has up to SR100 million ($27 million) at its disposal to hand out in loans and venture capital investments to commercially feasible ventures

DHAHRAN: Saudi Aramco’s entrepreneurship arm Wa’ed on Wednesday launched its first roadshow event to unearth and fund the next generation of Saudi entrepreneurs.

Wa’ed has up to SR100 million ($27 million) at its disposal to hand out in loans and venture capital investments to commercially feasible ventures that would fill existing gaps in the Kingdom’s economy.

Aiming to support game-changing ideas that will create new jobs, the Wa’ed entrepreneurship roadshow will hold a series of events in six Saudi cities from September to December.

Jubail, Yanbu, Riyadh, Jeddah, Makkah, and Madinah will play host to the tour being organized in association with some of Wa’ed’s key partners, including the Royal Commission for Jubail and Yanbu, Monsha’at, the Saudi General Authority for Small and Medium Enterprises, development firm Namaa Almunawara, and investment company Wadi Makkah.

“These shows are a coordinated effort with our partners to find and fund new entrepreneurs who will add value to the Saudi entrepreneurial ecosystem and accelerate the pace of economic diversification in the Kingdom,” said Wassim Basrawi, Wa’ed managing director.

Wa’ed’s aim is to seek bold ideas with potential to positively contribute to the development and diversification of the Saudi economy.

“Seventy out of over 100 startups we supported were the first of their kind and received their first-ever investment from us, and this is what we are targeting now; distinguished and not yet supported startups and ideas,” Basrawi added.

Online applications for all Saudi-based entrepreneurs were due to open on Wednesday. After two selection rounds, successful applicants will be invited to participate in the roadshows in their cities, where events will include startup pitch competitions in the style of TV’s “Shark Tank,” and industry discussions and debate.

The tour will focus on sectors such as financial, agricultural, and environmental technology, industrial applications, reverse engineering, drones, petrochemicals, supply chain, and tourism.

In addition to Wa’ed’s incubation and mentoring services, participants will either earn fast-track funding, including loans for up to SR5 million or venture capital investments with up to SR19 million, and non-refundable grants of SR25,000, SR50,000, and SR75,000.

Amin Nasser, chief executive officer of Aramco, said: “Wa’ed has come a long way since 2011 to support talented Saudis to help them turn their business ideas into real drivers for growth and innovation.

“But the next 10 years will be even more crucial for our entrepreneurial ecosystem as the pace of transformation in-Kingdom accelerates with opportunities emerging in new business growth sectors such as technology, e-commerce, and renewable energy.

“That’s why the roadshows by Wa’ed in six cities across the Kingdom are important to make the most of these opportunities to nurture and enable a more vibrant entrepreneurial culture in Saudi Arabia.”

All those taking part in the roadshow will be able to join and benefit from Wa’ed’s Innovation Ecosystem Society which has more than 1,500 local and international members and around 400 mentors.

Enrichment events and meetings with inspirational speakers, as well as interview-based podcasts, workshops, and webinars will start ahead of the competition and will continue until the end of the program in order to provide value to as many potential beneficiaries from the initiative as possible.

Through the scheme, Wa’ed intends to expand its portfolio more evenly throughout the country. Currently, around 60 percent of its investments are in the Eastern Province, with the remainder distributed around the Kingdom.

Wa’ed has also set a goal to double its annual loan and venture capital deal volume by 2023 in a bid to support the Kingdom’s entrepreneurial ecosystem and keep up with the pace of transformation and emerging opportunities in crucial sectors including technology, e-commerce, and renewable energy.

Wa’ed currently supports more than 100 entrepreneurial businesses in Saudi Arabia by providing the necessary financial support, guidance, and tools for entrepreneurs with creative ideas and startups.

Saudi Aramco’s entrepreneurship center was established in 2011 with a mission to nurture Saudi entrepreneurs and their businesses to strive and help develop the Saudi economy. Since its inception, Wa’ed has invested more than $100 million.

It is the only no-collateral lender and largest institutional venture capital investor in Saudi-based startups.


Indonesia lists three Islamic bonds worth $3bn on Nasdaq Dubai

Indonesia lists three Islamic bonds worth $3bn on Nasdaq Dubai
Updated 16 June 2021

Indonesia lists three Islamic bonds worth $3bn on Nasdaq Dubai

Indonesia lists three Islamic bonds worth $3bn on Nasdaq Dubai
  • The new listings bring Indonesia’s total value of listed sukuk to $19.75 billion

DUBAI: Three sukuk tranches, amounting to $3 billion, have been listed on Nasdaq Dubai by the Indonesian government.
The new listings bring Indonesia’s total value of listed sukuk to $19.75 billion, the Dubai Media Office reported.
“This mounting presence of international issuers clearly underscores Dubai’s active role in promoting Islamic economy, shariah-compliant financial markets as well as supporting sustainable economic development across the world,” Hamed Ali, CEO of Nasdaq Dubai, said.
The three sukuk tranches include one of $1.25 billion yielding 1.5 percent on a five-year maturity; a $1 billion bond with a coupon of 2.55 percent yield and 10 years maturity; and a $750 million green sukuk yielding 3.55 percent yield over 30 years.
Many central banks and sovereign wealth funds in Southeast Asia and the Middle East have expressed strong interest in the paper, with a combined order book exceeding $10.3 billion.