Tighter liquidity and trade gap having effect on Turkish stocks
ANKARA – The recent rise in Turkish assets which has followed the appointment of a new central bank governor and the passage of welfare reforms demanded by the International Monetary Fund may be short-lived. Economists see tighter global liquidity and Turkey’s large current account gap as obstacles to further advances. Istanbul’s main share index has risen more than 8 percent since the start of last week, and the lira has firmed by 2 percent against the dollar. That followed President Ahmet Necdet Sezer’s approval of Durmus Yilmaz to be the next central bank governor after a period of uncertainty about who would take charge, and parliamentary passage of a bill to overhaul Turkey’s deficit-ridden social security system. After this positive news, Turkish financial markets are now focused again on external factors such as tighter global liquidity conditions, analysts said. «When the news flow stops, people again look to abroad,» said Oyak Investment economist Mehmet Besimoglu. It is foreign investors who create movements in the Turkish markets as local investors mostly prefer holding fixed positions, said Besimoglu. Changes in borrowing costs in developed economies directly affect the flow of foreign funds to Turkey as interest rate hikes in developed economies entice investors from higher-yielding emerging market assets. Turkish investors have carefully watched the turmoil in Iceland – where assets have sunk on concerns the economy is overheating due to surging foreign investment and domestic consumption – and now eyes have turned to signals of interest rate hikes in Europe, Japan and the United States, one banker said. The IMF said last week in its semi-annual World Economic Outlook that the Turkish economy remained exposed to foreign investor trends. Official data showed last week that Turkey’s total debt stock rose to 334.4 billion lira ($251.42 billion) in March. Last week emerging market equity funds saw their second-slowest weekly flow total this year and the minimal flows into emerging bond funds continued, said Emerging Portfolio Fund Research in a note. «Investors continued to pump money into global and international equity and bond funds as a safer alternative to emerging markets,» the note added. Fortis Research said eurobond prices were falling because of a deterioration in global liquidity conditions while spreads continue to decrease. Current account gap Another factor that clouds investor sentiment is Turkey’s current account deficit, a weak spot of the fast-growing economy. The government target for the shortfall is 5.77 percent of gross national product this year by the government, but the central bank expects it to come out at 6.3 percent. «With this current account deficit, the markets will not be much affected even if we see a (credit agency) rating rise,» said Finansbank economist Saruhan Dogan. A large current account deficit was a factor in igniting Turkey’s deep financial crisis in 2001, and some economists fear it could cause future balance-of-payment difficulties. The IMF said in its outlook that the deficit was the main risk facing the Turkish economy. A large oil bill, falls in the number of tourist arrivals, a gaping trade deficit, appreciating exchange rates, capital inflows and soaring domestic demand and credit growth all contribute to the deficit. Other analysts say the market is backed by hopes of an interest rate cut from the central bank and hopes of a rating increase. «I clearly expect rate rises and an improvement in outlook because the rating agencies pointed at social security for a rise,» said Raymond James analyst Hakan Avci. Fitch said in a report late last year that the passage of social security reform was a trigger for an upgrade of the sovereign ratings. But Moody’s said it was too early to change the rating. The Turkish central bank’s monetary policy committee is expected to cut interest rates by 25 basis points today for the first time under Yilmaz, according to a Reuters poll of analysts.
