Turkey Wake up call: Macro and Political News, 14th January

This analysis by GLOBAL Securities is presented to you by Raiffeisen Centrobank AG. Raiffeisen Centrobank AG acts solely as a distributor of this analysis and has not introduced any material changes to the content of this analysis or any recommendation included herein.

Wake – up call

BIST added 1.34% yesterday, extendingits rally to the fifth consecutive day. After a small positive start that marked its lowest point of the day, BIST100 turned north and climbed to 120.9k level with a steep ascent before noontime. Rest of the day saw range-trading within the 120.2-120.7kband until the close. Banks gained 1.45% on average with YKBNK and VAKBN outperforming for the second day. PGSUS, THYAO, PETKM, EKGYO, EREGL, KRDMD, and CCOLA topped the leaders among non-banks while BIMAS, ULKER, TCELL, and TOASO stood out as rare declinersfor the day. Today, our local macro agenda involves the November'19 Industrial Production numbers at 10AM local time. Bloomberg consensus +5.5% yoy based on the estimates for calendar-adjusted series and +1.0% mom based on the seasonally & calendar-adjustedseries. Separately, Treasury will auction 15-month discount bonds and 7-year FRNs today ahead of its TL18.47bn domestic redemption this week. BIST seems headed for a flattish open in absence of major drivers for the start. Lira is flattish since last night,trading around the 5.8750 mark vs the greenback. U.S. futures are down a few points and Asian markets are trading mixed.
Macro and Political News:
(+) President Erdogan to visit Germany for Libya talks on January 19… President Erdogan is expected to pay a one-day visit to Berlin on Jan. 19 to attend the Berlin Conference on Libya.The Presidency did not give further details about the trip. However, Erdogan’s planned visit coincides with the day Germany plans to host a peace summit to restore order to the conflict-ravaged north African nation, a government spokesman said earlier Monday,amid a whirlwind of diplomatic efforts to push for an end to the crisis. Berlin’s confirmation came after a series of talks by parties likely to attend any such summit.
(=) FM Cavusoglu discussed Mideast with US counterpart… Foreign Minister Mevlut Cavusoglu discussed the latest developments in the Middle East with his U.S. counterpart Mike Pompeo by phone Sunday. Reportedly, Pompeo reiteratedthe need for NATO to play a greater role in the region and stressed the U.S. commitment to the U.N.-facilitated peace process in Syria. Their phone conversation came after a cease-fire brokered by Turkey and Russia came into effect in Syria’s Idlib province.Turkey pushed hard for the cease-fire after Idlib endured months of battering by forces of the Bashar al-Assad regime and its allies, sending about a million civilian refugees flocking to the Turkish border.
(+) Turkey’s CDS tumbles to 20-month low… Treasury and Finance Minister Berat Albayrak said Monday that Turkey’s credit default swaps (CDS) dropped to 265bps, the lowest level since May 2018. Albayrak underscoredthat since August 2018, when Turkey experienced a currency attack, 5yr CDS have seen an improvement of 320 points, referring to the country’s risk premiums. Albayrak said that the performance displayed by the economy in 2019 has increased the confidence inour country, adding that the government aims to move this forward in 2020. Two-year bond yields also fell to 10.72%, seeing the lowest level since Jan. 6, 2017. The two-year bond yields fell by 1,755 basis points from 28.27 points – a level the markets lasthit in September 2018.
(+) Turkish stocks hit 2-year high in the run-up to the MPC meeting… Turkey’s benchmark stock index hit its highest level in two years, reaching 120,899 points in the afternoon hours of the first trading day of the week as investors waitfor the CBRT’s interest rate decision on Thursday. Turkish investors have now turned their attention to the CBRT’s MPC meeting scheduled for Thursday. Economists are expecting the bank to maintain its cautious monetary stance to keep the disinflation processon track. Meanwhile, markets around the world moved higher as well after concern over a potential U.S.-Iranian conflict decreased and Libya’s warring parties agreed on a cease-fire. Investors also became optimistic ahead of the signing of the Phase One tradedeal between China and the United States.
(=/+) Survey forecasts see 50bps rate cut… All eyes are now fixed on Thursday’s MPC meeting as expectations spectrum was indeed divided between ‘no change’ and a ‘25-100bps rate cut’ scenarios in the 1W repo rate.The CBRT is expected to cut interest rates by 50bps based on state-run Anadolu Agency median survey results. While 12 economists forecast that the bank will not change rates, nine expected decreases, ranging from 25 to 100 basis points. We think the chancesof a 100bps rate cut in the 1W rate to 11.00% are not low at the moment.
On a separate note, Another Anadolu Agency survey showed that Turkey’s unadjusted industrial production index is expected to rise 5.8% for November 2019 on a yearly basis. The unadjustedindustrial production index in November’s survey ranged between 4.2% and 8.5%. On the other hand, in November, a total of 10 economists estimated the calendar-adjusted industrial production index will rise 5.3% on an annual basis. Unadjusted and calendar-adjustedindustrial production indices were up 2.8% and 3.8%, respectively, in October 2019 on a yearly basis. The term “calendar adjusted” is used to refer to data where calendar and holiday-originated effects are removed.
(=) Current account posts USD518M deficit in November… Current account balance saw a deficit of USD518mn in November 2019 vs consensus estimates conducted by the state-run Anadolu Agency. The balance posted a USD1bn surplusin the same month of 2018. The bank’s balance of payments figures showed the country’s 12-month rolling surplus amounted to USD2.7bn. The CBRT data also showed Turkey’s current account deficit - excluding gold and energy - posted a USD3.65bn surplus in November2019, down USD930mn in the same month last year. Travel items, which constitute a major part of the services account, saw a net inflow of nearly USD1.4bn, increasing by USD177mn year-on-year in November. To remind, Turkey’s new economic program forecasts acurrent-account-surplus-to-GDP ratio of 0.1% for 2019.
The financing account were relatively strong in November registering an inflow of USD3.1bn, following an almost null inflow (revised) in the previous month and a USD2.1bn outflow,in August-September period, in total. Nevertheless, the 12-month cumulative capital inflows declined to USD1.6bn from USD1.9bn a month ago. Meanwhile, the net errors and omissions (unidentified flows) showed an outflow of USD1.9bn, in November; however, capitalinflows were strong enough to finance CAD+E&O and enabled to a reserve accumulation of USD0.7bn in November.
In terms of the composition of the financial account, the capital flows were driven mostly by portfolio investments registering an inflow of USD2.1bn, mainly on the back of generalgovernment’s and corporate sector’s Eurobond issue of USD1bn, and USD0.6bn (net), respectively. FDI inflows declined significantly to USD0.2bn from USD1.3bn in the same month of last year. Banking sector currency and deposits abroad decreased by USD0.2bn,while non-resident banks’ deposits held within domestic banks increased by USD0.6bn. Finally, the external borrowing was anaemic in November for banking sector (USD-26mn), for general government (USD25mn) as well as for corporate sector (USD-22mn).
(=) Canal Istanbul to generate USD1bn from passing ships annually… A mega-project to build a canal through Istanbul, Turkey, will provide safe passage to 185 ships daily, compared to 118-125 ships through Bosporus Strait. Cahit Turhan,transport minister told Anadolu Agency on Monday that an estimated total of USD1bn per year will be collected from ships passing through Canal Istanbul. Turan noted that Turkey’s goal is to create a new waterway with a capacity to be thrice that of the BosporusStrait. He added that the Bosporus was one of the most risky crossing points for maritime traffic, with increasing commercial transportation threatening the lives of people living around it. To remind, the planned 45-kilometer canal to be built west of thecity center on the European side of the Istanbul province, aims to boost the city's marine through-traffic capacity.
(=) Turkey’s domestic car to be globally registered brand… Officials have been carrying out trademark applications meticulously abroad for Turkey’s homegrown fully electric car, following the vehicle’s introduction in Turkey inlate December. Turkey’s Automobile Joint Venture Group (TOGG) has already applied for design registration to several countries, including Russia, the U.S., India, China, Japan, South Korea and some European countries. Along with the applications, the venturegroup has also applied to the Turkish Patent and Trademark Office (TurkPatent) to receive the industrial property rights of the domestic car, which is set to begin mass production in 2022. The patent applications to TurkPatent included those of the rightsof the car’s cruise control system along with its semi-replaceable battery, interchangeable battery system and mechanical connection structure. The patent and registration authority has already approved applications made by TOGG under three different titles,while reports on other subjects are expected to be prepared by the authority soon.
The consortium’s sports utility vehicle (SUV) in the C-segment will be the first fully electric SUV in Europe. It will also surpass competitors with the longest wheelbase, largestinternal volume and fastest pickup performance. The fully electric SUV will come in two different engine configurations: 200 horsepower and 400 horsepower. The 400 horsepower will go from 0 to 100 kph in 4.8 seconds. It will have a range of up to 500 kilometres,and its locally produced lithium-ion battery will charge to 80% in under 30 minutes.
(=) New bill seeks to lower height of buildings, speed up zoning-related lawsuits… A group of lawmakers from the ruling Justice and Development (AK) Party presented the bill to Parliament on Monday, bringing Turkey closer to realizing what its proponentscall “horizontal architecture”. The rather cumbersomely titled “Bill Regarding Amendments to Geographical Information Systems and Miscellaneous Laws” has the potential to bring about a complete overhaul on urban development projects across the country. Thebill primarily aims to reform zoning and drastically hasten the conclusion of legal disputes regarding urban planning. However, one of the most important proposals comes in the form of the limiting of the number of floors in new buildings. It will effectivelyend arbitrary limits imposed by local administrations, paving the way for buildings with fewer floors and halting the construction of skyscrapers, largely deemed an eyesore, especially when overshadowing the historical parts of cities.
The AK Party’s Parliamentary Group Deputy Chairman Mehmet Mus, who led the lawmakers behind the bill, said at a news conference in the capital Ankara on Monday that “Buildings willno longer go up however high builders wish”. The new regulations would involve “limitations in zoning plans (with) a specific height based on the approximate height of buildings in a given area”, he said. Also, Mus said the bill seeks to “bring urbanizationto a higher level” and create “more beautiful cities”. Among other changes, the bill proposes a faster legal process to speed up verdicts in cases of zoning disputes. The bill also targets illegally built, unlicensed buildings. Based on the bill, if municipalitiesfail to demolish unlicensed, illegal buildings, the government will undertake the demolition and in return, subtract the demolition expenses from funds to municipalities provided by the government. Note that the number of fines would also be increased.
(+) Danish pharma giant Novo Nordisk makes Istanbul regional management hub… Novo Nordisk, a Denmark-based multinational pharmaceutical company specialized in diabetes and other serious chronic diseases, has decided to expand its operations and makeTurkey’s biggest metropolis Istanbul its regional management base from where it will be running operations in a region with a population of around 1.6 billion. From its headquarters in Istanbul, Novo Nordisk will now be responsible for the Business Area NearEast, Commonwealth of Independent States (CIS) and Africa (BANECA) region with a combined population of around 1.6 billion. Novo Nordisk’s corporate vice president said it was the company’s appreciation of highly qualified and innovative labour force thatmakes it open to change, in addition to the geographical advantages of managing operations from Turkey’s largest city.
(=) Treasury to issue two bonds today… Turkish Treasury and Fnance Ministry will issue two bonds today; i) zero couponbond with maturity of 15 months ii) a floating rate note with a maturity of seven years and semi-annual payments.