Turkey Wake up call: Macro and Political News, 7th February

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 inched down 0.03% yesterday after spending most of its day in the positive territory. Index had a positive start and quickly climbed further to 123.0-123.5k levels where it floated until 4:30PM. But selling pressure after this hour erased market’s earlier gains and led to a flattish close. Banking index was down 0.01% as the 5.0% jump in YKBNK following Unicredit’s placement at a reasonable discount balanced out declines in GARAN and AKBNK. VESTL, TTRAK, ARCLK, SISE, TRKCM, THYAO, and MGROS topped the non-bank gainers while PGSUS, ENKAI, EKGYO, TTKOM, and TCELL were among the weakest names. Today, our local macro agenda involves Treasury's cash budget balance for January'20 to be disclosed at 5:30PM local time. We predict a sideways start for the BIST in absence of visible triggers in either direction. Lira is also stable around with USDTRY pair around 5.9850 mark. U.S. futures are barely changed while Asian markets are mostly trading with slight losses.
Macro and Political News:
(=) Redrawing borders of Idlib de-escalation zone out of question… Turkey’s Presidential Spokesman Ibrahim Kalin said Thursday that redrawing the borders of the Idlib de-escalation zone, as determined by the Astana and Sochi agreements, is out of the question. Mr Kalin highlighted that the borders agreed on in Sochi are the ones Turkey recognizes. Speaking at a news conference Thursday, Kalin said the next meeting of the Astana process could be held in March. Also Kalin said Turkey will continue its efforts with nongovernmental organisations to prevent the further flow of refugees from Idlib.
On a separate note, in response, the Turkish military targeted Assad forces throughout Monday. The Turkish Armed Forces (TSK) also established temporary military bases and observation points in four different locations in Saraqib. Throughout the night, the TSK continued deploying additional military forces to the region. A military convoy of 10 vehicles crossed the border into northwestern Syria. The TSK also bolstered its security on the key M4 and M5 artery highways. Meanwhile, Turkish artillery has been pounding regime targets, with Turkish tanks patrolling the area to prevent any possible threat.
(+) US offers Turkey help and warns Russia over Idlib… The United States on Wednesday offered help to Turkey and threatened sanctions to press the Syrian regime and its ally Russia to halt a major new offensive. James Jeffrey, the U.S. Special Envoy for Syria Engagement and for the Global Coalition to Defeat Daesh, said Washington was very, very worried about the Syrian regime assault on Idlib which was backed by Russia and he repeated calls on Moscow to stop it. Jeffrey told reporters that they are moving forward on additional sanctions. He did not name the targets but suggested that they would be in Syria. Also, Jeffrey said that they’re asking the Turkey what help they need. Jeffrey also doubted Russia’s justification that it had come under growing fire from the militants, who are not part of the cease-fire.
Jeffrey said the immediate solution should be a permanent cease-fire before talks on all issues including the status of the militants. The U.S. envoy also stepped up warnings to Russia over its Syria policy, saying Moscow was trying to challenge the U.S. presence in northeastern Syria by violating the terms of a de-confliction agreement and was also helping escalate the fighting in the northwestern province of Idlib.
To remind, on Wednesday, Syrian regime forces entered Saraqeb in Idlib, a war monitor and eyewitnesses said, in a renewed push by Bashar Assad to recapture the last opposition stronghold. Jeffrey said Moscow could change its policies and meet the requirements of the international community without ousting Assad. Moscow has been filling the vacuum of U.S. withdrawal from the area, ramping up its military presence in Syria’s northeast, and de-confliction agreements between the two sides ensure that they avoid any clashes. But Jeffrey said there have been more incidents of Russia violating the terms of de-confliction in what he characterized as an attempt to challenge the U.S. presence there.
(+) Russian delegation to visit Turkey over Idlib attack… Mevlut Cavusoglu, Foreign Minister, said a Russian delegation is expected to visit Turkey in the wake of a Syrian regime attack on Turkish troops in Idlib. Speaking to the reporters in the Azerbaijani capital Baku, Cavusoglu said the Turkish and Russian leaders will meet too, if there is a need. He recalled that Turkey, Russia and Iran work in Ankara, Moscow, Sochi, Tehran, and Astana for a permanent cease-fire in Syria and political solution for the crisis. FM Cavusoglu highlighted that in the recent phone conversation, President Erdogan and Russian counterpart Putin addressed all the issues extensively and reiterated cooperation. Cavusoglu underlined that Turkey did not target Russia but the Syrian regime in Idlib as the regime is responsible for the attack on Turkish troops.
(+) EU regulates terms for accession talks… The European Commission adopted a new procedure for accession negotiations to the union, with an aim to have a more credible process as the current candidate countries like Turkey wait in anticipation. Announcing the revision Wednesday, the commission claims that the alterations base the accession negotiations on four main pillars: credibility, stronger political steer, a more dynamic process and predictability for both sides. It aims to make the enlargement process more credible, predictable, dynamic and subject to stronger political steering. This will reinvigorate the accession process and make it more effective, enhancing credibility and trust on both sides.
The new procedure incorporates several ideas suggested by the French government, which opposed further enlargement of the union by preventing the process from continuing for North Macedonia and Albania. For example, the negotiation process can be reversed or completely suspended in case of no progress or backslide in certain policy areas. In reality, it means that already closed negotiation chapters can be reopened if the candidate country failed to deliver the promised reforms. The European Commission will also join forces with national experts from member states to assess the candidate country’s development. With the new regulation, the commissioners explained that the EU perceives enlargement as geostrategic investment to establish peace and prosperity in the region. They also expressed hopes that EU leaders would give a green light for starting accession negotiations with North Macedonia and Albania before May’s EU-Western Balkans Summit in Zagreb. Nevertheless, note that EU heads of state and government could not approve the opening of the enlargement process with the two countries due to France's opposition in October.
Moreover, the EU offers to speed up the negotiations process if it is apparent at the opening of the negotiation chapters that the candidate country will be able to implement the required reforms immediately. This way, the negotiation chapter can be closed in one year instead of the usual period of six to eight years. According to the new proposal, EU leaders are required to have an annual debate on the achievements of the candidate countries.
The new methodology only concerns those countries that have not yet started the negotiations process. That is to say, it will be formalized into the process for North Macedonia and Albania. However, for instance, when it comes to Serbia and Montenegro, embracing the revision will depend on their preferences, although the commission advises it for the most part.
As of 2020, there are three countries that are in the negotiation process: Turkey, Serbia and Montenegro. Although Albania and North Macedonia are regarded as candidate countries, their negotiation process is yet to be started while Kosovo and Bosnia-Herzegovina are considered potential candidates.
Among these countries, Turkey is the one with the longest history with the union, including the longest process of negotiations. Many other countries, such as Bulgaria and Croatia, have become member states within the past decade, despite applying for candidacy much later than Turkey.Apart from this slow process of negotiations, the potential membership of Turkey in the union faced a new challenge in 2016, when a coup attempt by the Fethullahist Terror Group (FETO) took place, forcing the country to declare an state of emergency. Unhappy with this move, the European Parliament on Nov. 24, 2016, stated that it would temporarily freeze the negotiations with Turkey, which has caused the process to remain at a standstill since then.
However, recently, Turkey has been preparing a new initiative to accelerate the accession process to the EU. Accordingly, Turkey will complete regulations for six more chapters, including the fight against terrorism. On Wednesday, Foreign Minister Mevlut Cavusoglu said that it is time to usher in a new era with the EU in Turkey's nearly half-a-century-long accession talks, calling on the bloc to review its decision to suspend high-level meetings between the two sides.
FM Cavusoglu said in a meeting with EU ambassadors that they see a constructive approach of EU’s term president Croatia on this issue, adding that anti-Turkey rhetoric among the bloc is recognized not only by the Turkish government but also by the Turkish people. Despite the intention of the country to move on, there are several challenges awaiting Turkey. Probably the biggest one is the dispute over Cyprus, which has been the major issue in the negotiation process. Greece and Greek Cyprus have long used the veto card in EU institutions against Turkey.
(=) Cash Budget (Jan) due today at 11:00am local time… There is no consensus available.

Sector and Company News:

(=) According to the weekly banking data published by BRSA, total loans inched up 89 bps w/w and 1.32% year-to-date. The main driver of the total loans has been the GPL segment that increased by 3.75% year-to-date and 32.79% y/y time frame. While all other loan segments are limited but up, only vehicle loans showed a slight contraction from the beginning of the year by 102 bps. Commercial loans segment remained muted, up by only 95 bps year-to-date and Fx indexed loans continued its declining trend since last year, down by 2.11% w/w and 6.01% year-to-date.

In terms of total deposits, a very limited elevation has been evident, up by only 2 bps w/w and 92 bps year-to-date time frame. However, the composition of “lower loan growth rate than deposit growth” has changed 40 bps in favour of loans. While loan growth was up by 132 bps, total deposits increased only by 92 bps year-to-date as mentioned above

(TL, mn) 31/01/2020 w/w y-t-d
Total Loans 2,681,909 0.89% 1.32%
Consumer Loans 480,560 0.96% 2.82%
Housing 202,737 0.61% 1.74%
Vehicle 6,979 0.10% -1.02%
GPL 270,845 1.25% 3.75%
Consumer Credit Cards 118,941 2.98% 1.84%
Commercial and Other Loans 2,082,408 0.76% 0.95%
Installment Commercial Loans and Corporate Credit Cards 439,086 0.83% 1.08%
SME Loans 620,431 0.95% 1.42%
Fx Indexed Loans 11,098 -2.11% -6.01%


Total Deposits 2,590,915 0.02% 0.92%
Natural Person 1,608,257 0.58% 0.82%
Demand 373,697 0.82% 3.76%
Time 1,234,560 0.50% -0.04%
Commercial Institutions 819,337 -2.08% 0.21%
Demand 228,692 -2.28% 3.56%
Time 590,645 -2.01% -1.02%
Official and Other Institutions 163,321 5.67% 5.69%
Demand 49,162 23.73% 44.96%
Time 114,158 -0.58% -5.36%
Deposits Subject to Insurance 702,998 -0.22% 0.58%

Total Fx Deposits with Banks (USD, mn) 215,296 -0.55% 0.38%

Total Fx deposits of residents continued its declining trend last week as well, down by 73 bps w/w. The main driver of this decline has been the reduction of corporates’ Fx deposits, down by 2.22% weekly however, real persons preferred to add on their current Fx deposits by 20 bps w/w . While dollar denominated deposits declined by 2.19% w/w Euro denominated Fx deposits inched up 92 bps in the same time frame.

(USD, mn) 31/01/2020 w/w y-t-d
Total FX Deposits of Residents 175,260 -0.73% 0.21%
Real Persons 108,555 0.20% 0.46%
Dolar ($) 73,138 -0.71% -0.60%
USD Eqv. of Euro 31,915 0.09% 1.03%
Corporates 66,705 -2.22% -0.20%
Dolar ($) 36,261 -2.19% -3.37%
USD Eqv. of Euro 36,560 0.92% 6.88%

(=) Amendment on Turkish Banking Law has been proposed yesterday. According to the draft:
• The banking executives who “endangers banking system” will be charged with his/her temporary removal of signing authority.
• The transactions with Turkey Wealth Fund will not be subject to any loan limit.
• Development and investment banks’ innovative methods for financing will be counted as “loans”.
• Central Bank of Turkey will be the authority for banking commissions and fees.
• The minimum jail sentence for “insider trading activity” and “manipulation” crimes will increase to 3 years.
• BRSA will be the main authority to define the scope of “manipulation” and responsible to publish the terms on Official Gazette.
• BRSA will be authorized to take “early action”.
• BRSA will be authorized to decide the banks’ information systems to be installed and kept in domestic infrastructures.
• Securitization on infrastructural investments will be available for individuals.
• The government to be eligible to limit the access on internet connection to prevent irrecoverable losses.

(=) PETKM said that related to the announcement about Special Consumption Tax (SCT) fine notified in August 2017, they couldn’t reach a mutual agreement in the settlement process and hence the company initiated legal proceeding. Recall that Petkim had been notified by Tax Authority regarding SCT at an amount of TL66mn and tax penalty at an amount of TL99mn, upon an investigation related to PyGas consumption in 2014. The company believes that original tax charges and penalties will result without leading to a major financial risk through lawsuit by taking into account that Regional Administrative Court has approved that PyGas consumed by the company had GTIP number that was not subjected to SCT.
We deem the news to have a limited impact on the share price as there is no expected payment for now, yet if a payment possibility emerges, we think it will have a slightly negative impact on the share price.

(=) ENKAI bought 1mn lots of its own shares with TRY6.93-6.97 price range per share.

(=/+) TAVHL is to release its 4Q19 earnings today. The consensus EBITDA and net profit estimates are at TL311mn and TL1.534mn and our estimates are at TL316mn and TL1.662mn, respectively. Despite expected YoY lower operational figures in 4Q19 due to the absence of Ataturk Airport income, TAVHL's net income is expected to boost with compensation from early closure of Ataturk Airport.

(=) ARCLK is to release its 4Q19 earnings today. The consensus EBITDA and net profit estimates are TL895mn and TL239, respectively. Our estimates are TL888mn and TL194mn, respectively.

(=) ISCTR is to release 4Q19 earnings today after market close. The consensus estimate is TRY2290mn and Global estimate is TRY2083mn net income for 4Q19.