Turkey's stocks and dollar bonds tumble as Erdogan in pole position for runoff (updated)
14/05/2023 21:38
(Updates prices throughout, adds CDS comment on paragraph 10)
By Libby George and Karin Strohecker
LONDON, May 15 (Reuters) - Turkey's sovereign dollar
bonds and equities tumbled, and the cost of insuring exposure to
the country's debt spiked as Turkey's presidential race heads to
a runoff with incumbent Tayyip Erdogan leading his opposition
rival.
Turkey's main banking stock index .XBANK tumbled 9.6% as
markets gauged potential fallout from a possible continuation of
Erdogan's unorthodox policies including combating high inflation
with low interest rates. The index rose last week 26%, the
largest weekly gain since late 2002.
The Istanbul bourse benchmark .XU100 fell 6.1% on Monday,
its largest daily percentage drop since early February.
The tightly controlled lira TRYTOM=D3 posted its largest
percentage drop in over six months to end at 19.67 per dollar -a
closing record low. It earlier touched 19.70, not far from the
record intraday low of 19.80 hit in March.
Turkey's election board confirmed a May 28 runoff between
Erdogan and opposition rival Kemal Kilicdaroglu after neither
candidate secured the 50% threshold to win in Sunday's election.
With most votes counted, Erdogan led with 49.51% of the vote
over Kilicdaroglu's 44.88% share.
In the parliamentary vote, the People's Alliance including
Erdogan's AKP appeared headed for a majority.
"From the market reaction so far it's very conclusive that
the market is expecting Erdogan to win in the second round and
we will get more of the same," said Dan Wood, portfolio manager
of emerging market debt at William Blair.
"You can see on the sovereign bonds, investors really voted
with their feet."
Some of Turkey's dollar-denominated sovereign bonds fell by
more than 7 cents, while the five-year Turkey credit default
swap spread TRGV5YUSAC=MG jumped 141 basis points (bps) to 634
bps, the highest since November 2022, according to S&P Global
Market Intelligence.
"I haven't been ensuring credit risk or sovereign payment
risk in Turkey for the last three years. I’ve been declining
it," said Crispin Hodges, head of trade political risk at
Canopius Group, commenting on the big spike in CDS pricing.
"Erdogan retaining power would mean the status quo would
be maintained for us, where we continue to decline Turkish
business because of the state of the economy, because of the
inflation, because of the weak currency and because of his
policy strategy.
Hard-currency bonds of Turkish lenders also came under
pressure. Akbank saw its 2026 bond slip over 3 cents on the
dollar to trade at just under 93 cents, the lowest since
November. XS2131335270=TE
The presidential vote will decide not only who leads Turkey
and shapes the foreign policy of the NATO-member country of 85
million people, but also how it is governed and how it tackles a
deep cost-of-living crisis.
Last week, Turkish stocks and bonds rallied when third-party
presidential candidate Muharrem Ince withdrew from the race,
boosting expectations of a Kilicdaroglu win.
"Now we are back to square one," said Emre Akcakmak, senior
consultant with East Capital.
"I think if Erdogan is continuing, which is the strong base
case, then foreign investors will be on the sidelines," Akcakmak
added.
Richard Briggs, Candriam senior fund manager for emerging
market debt, said that an Erdogan win could mean a continuation
of economic imbalance, unorthodox monetary policy and costly
efforts to prop up the lira.
"If Turkey continues to run large current account deficits,
once those flows halt or reverse, pressure on the currency and
the economy could be severe without a credible policy framework
which is less likely under the existing administration," Briggs
said.
JPMorgan JPM.N had forecast that the lira, which has
weakened 5% since the start of the year, could reach 24-25 to
the dollar. Goldman Sachs calculations showed the market was
pricing the lira to weaken by 50% in the next twelve months.
On Monday, lira volatility gauges fell, suggesting it could
remain stable in the short term.
"We suspect that policymakers will pull out all the stops
needed to ensure stability ahead of the second round run-off,"
James Reilly, assistant economist with Capital Economics wrote
in a note.
"But we think they will gradually loosen their grip on the
lira thereafter, allowing a (relatively) smooth deprecation
against the U.S. dollar."
(Reporting by Karin Strohecker and Libby George in London and
Amruta Khandekar in Bangalore; additional reporting by Rodrigo
Campos in New York; Editing by Sonali Paul, Christopher Cushing,
Emelia Sithole-Matarise and David Gregorio)
((rodrigo.campos@reuters.com; @RodrigoCampos;))