Investors were shocked after Erdogan slammed the Turkish market


Emerging-market investors are well accustomed to unpleasant surprises from Turkey. But the latest – a respected central bank governor who has been in office for only four months – has come under fire for firing late into the night.

The Expulsion of Nasi AgabalThat’s right 36 hours When the market opened on Monday, he sent Turkish currencies, stocks and bonds to freefall, forcing an additional two percentage points on the country’s benchmark interest rate. For foreign fund managers, this is bad enough.

But Turkey’s money markets have also been hit hard. Investors say it has become more difficult to pull their money or hedge their exposure to the lira in an event that could cause permanent loss of investor confidence.

“It’s a real disappointment,” said Yarlan Sijdikov, head of Amundi’s London-based emerging market, Europe’s largest asset manager. “We got right where Turkey is rebuilding credibility.”

Sijdikov jumped positively in early October 20 after being shot by Agabal in Turkey’s debt, both corporate and sovereign, and with a long position above the lira. Inside Chaotic market After being fired, he could not go the opposite way.

“It’s been several days,” said an unpublished Szdikov. “We are trying to reduce our exposure. We were able to bring it down neutrally, but we were overweight. The [market] The situation is very difficult. Liquidity has evaporated. Foreign investors are quite disappointed. ”

Analysts and associate fund managers say securing the foreign funds that Turkey needs in the future will make the feeling of being trapped in a bad bet harder and more costly for Turkey.

“Markets took Agabal’s appointment as a fundamental change. Hedge funds and other investors invest their money. But I knew the president would never change, “said a former Turkish official.” It tells you that there are no rules. You don’t treat those who finance your current account deficit that way. “

President Recep Tayyip Erdogan has long had a clear relationship with foreign fund managers. Opposed to higher interest rates, which he had previously labeled “Mother and Father of All the Wicked”, He has spent years railing against mainstream economists agreeing to help curb harmful inflation. During the 2018 lira crisis, he referred to a shady “interest rate lobby” of Western financing rather than undermining his patriarchal rule.

However, orthodoxy was prevalent towards the end of last year. Agal was appointed to run the central bank – an economic upheaval that included Finance Minister and Erdogan’s son-in-law Berat Albayrak, who Did not order Respect for external observers, not expelled.

Aggregate sets raise several consecutive interest rates – 8.75 percentage points by the time Erdogan fired him. In just four months, the lira has risen 16 percent, becoming the first head of the central bank to chair a strong lira since the 2008 financial crisis – a major step towards controlling inflation, which is still at about 15 percent this year

The one-month% change line chart shows the turmoil in Istanbul's stock market

The most recent data point is that about $ 16 billion was poured into Turkey to chase interest on the juicy lira through currency exchanges between August 7 and March 19, according to data from the central bank. And $ 4 billion lira entered the country to buy government bonds, while net inflows to equities were about $ 700 million at the time, reaching about 8 1.8 billion in February. The additional trend in sovereign bonds in foreign exchange, corporate bonds and loans added another 4 4 billion, according to the International Finance Institute.

However, it appears that the final increase in the rate, which was twice the size of the economists’ forecast, was too much for Erdogan to get into. Some investors said such a large increase was unnecessary. A small mustache in the face of rising U.S. government yields on bonds was probably enough to drive the lira.

People familiar with the matter say Agabal, who did not reach for the article, knew the scale of the uprising would upset the president. They had been estranged from Erdogan for weeks and knew that a bigger uprising in March would not bless him, they say.

The Turkish press, loyal to the president, raised criticism of his role. Yeni াকafak, a pro-government newspaper where the fence is replaced Sahap Kavsioglu Wrote a column, a warning shot the day after the latest rate hike. The daily accuses him of serving mainly “London-based hot money owners”.

The former banker, who was now deputy chairman of the Conservative Future Party, said August’s criticism intensified when he was a senior columnist in a mass circulation newspaper run by the former finance minister’s brother. Albayrak said the business community was complaining about the high rates.

Offshore overnight swap line chart (annual%) shows Turkish money occupying the market

“When Nasi Agabal was prevented from changing senior central bank staff within his first 100 days, people saw it as a weakness and began to notice him,” Rota said. “I knew his tenure would not be long. . . Although I never guessed it would be this short. “

International money managers, however, did not accept the signs that Agabal’s position was in immediate danger and dismissed the inconsistency as nonsense.

Agabal’s firing spread to the market and the lira fell 11 percent this week and during this time Borsa Istanbul threw the index of 100 shares. Of the $ 16 billion in currency exchanges during the Agal period, more than 6. 6.5 billion is left in two days. Investors were hit hard by buying local currency government bonds: 10-year bonds continue to lose a fifth of their value in five days. The rush to get out was full.

“What we’re seeing now is the rear capital controls,” said the former Turkish official

The line chart (%) of yields maturing on dollar bonds in June 2031 shows that Turkey's borrowing costs have increased.

Analysts and investors say that when markets opened on Monday, local Turkish banks made it harder for foreign investors to get out of their positions in exchange for currency. In order to exit before the expiration date of any exchange contract, many have tried this week, they need to borrow lira.

The interest rates that Turkish banks charge for lira loans have risen sharply 1,400 percent annually In the crowd on Tuesday. Supplies were also very limited, as Turkish banks were limited in the amount they could pay by regulators. A Turkish investor in the director of foreign funds, who was stranded this week, said the limited liquidity echoed previous volatility. In 2019, for example, “there was verbal communication [from the central bank] Every lever given to that foreign opponent needed approval, ”he said.

“We’ve never had a domestic bond, which was a huge relief this week,” said Kiran Curtis, head of local currency debt at the emerging market of Aberdeen Standard Investments. “However, we have completely switched our lira positions. It was not easy. It was expensive and there was not much liquidity or transparency in terms of price. Merchants must have made their money by making money from us. “

In February 2021, Nasi Agbal and his successor, Sahap Kavisioglu, less than two months later, Reuters

Despite clear sympathy for Erdogan’s unconventional approach to monetary policy, Cavicioglu remains unknown. He can still find a way to express concern at this delicate moment where any U.S. economic recovery could pull the lira further against the dollar. In the coming days he will speak to international bankers and fund managers and has already said he wants to control inflation in his new role. The central bank could not be reached for comment.

Investors say the rate cut will be a worrying sign of Kavioglu’s intentions, especially before the next scheduled meeting in April. They further agree that this latest shock means they will demand higher costs to reduce the risk of further disruption.

“It’s not too early to say whether we’ll be back again,” said Curtis of the Aberdeen Standard. “You never said. I am an emerging market bond fund manager and the countries you can choose from do not have an unlimited menu, especially where there is a possibility of earning too much. But it’s much more risky than a week ago. ”

The push also risks hitting Turkish businesses. Murat Gulkan, chief executive of OMG Capital Advisors in Istanbul, said: “The net result has greatly tightened the financial situation.” In ruthless irony, it could make it harder for businesses to take on orro for investment, as Erdogan forced a break that seems so desperate for growth.

The five-year CDS spread line chart (base point) shows the cost of protecting Turkish debt from defaulters.

Additional reporting by Eva Eslay.



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