Turkey stocks rally, lira slips to record low after Erdogan victory
Updates market reaction, adds analyst comments
LONDON, May 29 (Reuters) -Turkish President Tayyip Erdogan won re-election in a runoff vote, extending his rule into a third decade. The nation is grappling with a cost of living crisis, a plunging currency and depleted foreign reserves.
MARKET REACTION:
LIRA: The Turkish currency touched a fresh record low of 20.105 on Monday. It has fallen more than 7% since the start of the year, and lost more than 90% of its value over the past decade. TRYTOM=D3
DEBT: Turkey's international bonds were mixed, with the 2030 issue gaining 0.5 cents US900123AL40=TE while other maturities eased 0.2 cents US900123BG46=TE. Five-year credit default swaps were hovering at Friday's closing level. TRGV5YUSAC=MG
STOCKS: Turkey's benchmark index .XU100 gained 4.4% on Monday while the banking sub-index .XBANK was trading 3.1% higher.
COMMENTS:
MINNA KUUSISTO, CHIEF ANALYST, DANSKE BANK
"Recep Tayyip Erdogan has sealed his iron grip on Turkey. In the absence of a u-turn in his economic policies, the risk of an acute currency crisis looms."
"In a scenario where Turkey ran out of foreign currency, lira’s value would likely collapse, inflation would explode and goods shortages could occur. Turkish corporates with large foreign liabilities would face rising rollover risk."
JEFF GRILLS, HEAD OF EM DEBT, AEGON ASSET MANAGEMENT
"The main concern for Turkey is its ongoing challenges in maintaining economic stability and attracting investor confidence. The election outcome, with Erdogan securing a solid majority, suggests a continuation of policies that have contributed to a decline in the country's fundamentals."
"The depreciation of the lira and the strain on already low reserves add to the concerns for bond investors. Investors will focus on Erdogan's ability to implement substantial change in policy to address these challenges. However, given the expectation that a significant transformation is unlikely, Turkey's economic difficulties and the underperformance of USD bonds in the medium term are expected to persist."
ROGER MARK, ANALYST NINETY ONE
"In our view, Erdogan's biggest challenge is Turkey's economy. His victory comes against a backdrop of perilous economic imbalances, with his heterodox economic model proving increasingly unsustainable.
"Without a change in policy direction, Turkey is heading towards a more extreme balance-of-payments crisis with a rising likelihood of tighter capital controls. In an extreme scenario, this could see the 'lirafication' (forced conversion) of residents' extensive dollar deposits and the prospect of Turkish borrowers defaulting on external obligations."
HASNAIN MALIK, HEAD OF EQUITY RESEARCH AT TELLIMER
"An Erdogan win offers no comfort for any foreign investor. A painful crisis affecting all assets is on the way, with very high inflation, very low interest rates and no net foreign reserves. Only the most optimistic would hope that Erdogan now feels sufficiently secure politically to revert to orthodox economic policy."
CLEMENS GRAFE, CO-HEAD OF CEEMEA ECONOMICS, GOLDMAN SACHS
"Unlike the first round results which came as a surprise to markets and markets strongly reacted, we think the outcome of the second round was now mostly expected and we would not expect much of an immediate market reaction. The focus of the market will continue to be on the TCMB's FX reserves and the TRY (Turkish lira). International reserves have continuously fallen since the beginning of the year and are close to levels when previously TRY volatility sharply increased.
"With the election now behind us, we put our rate forecast on hold. Our previous forecast was probability weighted depending on the election outcome. With President Erdogan now re-elected we will switch back to a modal forecast."
SERDAR PAZI, RESEARCH GROUP DIRECTOR AT GLOBAL SECURITIES
"We may observe a short-term rally in equities, particularly in line with the exchange rate, which is likely to stay above 20 levels. Exporters may benefit significantly in the meantime. Mr. Erdogan praised the low-interest rate policy during his campaign as well as in his victory speech last night. We think a reversal of this policy remains unlikely, at least until the local elections, which will be held at the end of 1Q24. Meanwhile, the authorities could continue to rely on restrictions and regulations to keep the TRY depreciation in check amid a high current account deficit and low FX reserves."
ERCAN ERGUZEL, BARCLAYS
"Against the picture of assets and liabilities...and growing external financing costs, we are of the view that Turkey
needs adjustments to both FX and rates. Relatively light pressure from external financing needs over the summer provides an opportunity to make this adjustment gradually."
THOMAS GILLET, DIRECTOR OF SOVEREIGN RATINGS, SCOPE RATINGS
"Capital controls and macroprudential measures, such as limits on cash withdrawals, the deposit protection scheme, and coercive actions on banks’ portfolio allocations, are likely to remain at the core of Turkey’s economic policies.
"Turkey will need more bilateral and mostly unconditional external support, in the form of direct lending, currency swaps, and energy trade agreements, to partially ease acute pressures on balance of payments and external buffers.
"Deepening macroeconomic imbalances, resulting from erratic policy-making, would inevitably increase the risks of a disorderly adjustment and make any period of policy normalisation more complex to navigate in the longer run."
ERIK MEYERSSON, CHIEF EM STRATEGIST, SEB GROUP
"We expect Erdogan to see his re-election, albeit under extreme authoritarian institutions and in the absence of free and fair elections, as vindication to his broad menu of policies, economic and foreign.
"The combination of the policy environment, deteriorating economic fundamentals, the upcoming election cycle, and expected foreign policy challenges leave Turkey vulnerable to various shocks, domestic and external."
TUNCAY TURSUCU, FOUNDER OF TUNCAY TURSUCU RESEARCH AND CONSULTING
"Yesterday, President Erdogan's economy-oriented statement and his emphasis on an internationally respected financial management have created an expectation in the markets for a change in current economic policies. It can be said that this also has an effect on today's aggressive (stock) purchases.
"However, in order for this rise to be permanent, it is necessary to determine the Cabinet, to clarify the names that will come to the economy management, and to announce a new roadmap, if any, on the economy."
ANALYSIS-Investors' hopes for Turkey's economic future ride on new cabinet picks nL8N37Q21B
Turkish lira teeters near record low as Erdogan secures victory nL1N37P0IC
ANALYSIS-Turkish lira's long decline a symbol of strife nL8N37N1OM
Turkey's Erdogan triumphs in election test, extending his 20-year rule nL8N37Q0DE
NEWSMAKER-Erdogan defies predictions of political demise ahead of Turkey election runoff nL1N37P058
EXPLAINER-Turkey election 2023: What's at stake in the runoff? nL1N37P055
Reporting By Karin Strohecker, Libby George, Canan Sevgili and Rodrigo Campos; editing by William Maclean and Mark Heinrich
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