Turkey Wake up call: Macro, Political and Equity News, 1st April

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Wake – up call

BIST climbed 1.80% yesterday after a day spent entirely in the positive territory. Benchmark BIST100 opened higher and climbed to its daily peak of 90.2k around 11AM while some profit taking afterwards trimmed the gains to a limited extent. Banks somewhat lagged the broader market with the 1.44% gain in their sector index. Aviation stocks, Sisecam group names, ENJSA, ENKAI, and TKFEN stood out among the non-financial gainers while KOZAL, TCELL, TOASO, MGROS, and MAVI were the handful decliners in the BIST100 space. Today, our local macro agenda showcases March'20 PMI to be announced at 10AM local time. The index had climbed 2.1% on a sequential basis to 52.4 in February in its highest print in two years thanks to a marked expansion in new orders that had, in turn, also pulled the growth in output and employment to highest since February'18. Separately, Istanbul Chamber of Commerce will reveal its March'20 inflation numbers for metropolitan Istanbul at noon local time. BIST seems off to a negative start given the 1.4-1.8% overnight losses in major U.S. indices from the time we left as well as the slide in lira (USDTRY now at 6.6230 vs 6.5817 at yesterday's closing bell). U.S. futures are down over 3% on renewed virus concerns and Asian markets are mostly trading in the red.
Macro and Political News:
(+) Erdogan and Trump stress need for cease-fires across Syria and Libya amid Covid-19 outbreak… President Erdogan had a phone talk on Tuesday with the U.S. President Donald Trump, stressing the need for cease-fires across Syria, Libya in light of coronavirus risk. The White House reported that Trump and Erdogan discussed ongoing efforts to combat the coronavirus in the US and Turkey. The two leaders agreed to work closely together on the international campaign to defeat the virus and bolster the global economy, according to the White House statement. Also, the two leaders discussed critical regional and bilateral issues. Reportedly, President Trump and President Erdogan agreed it is more important now than ever for countries in conflict, particularly Syria and Libya, to adhere to ceasefires and work toward resolution.
(+) Inflation expected to dip in March on back of plummeting global oil prices… Turkey’s consumer price index is expected to have declined in March, surveys showed Tuesday. The decline was driven mainly by plummeting global prices and not because of fallout from the coronavirus outbreak. The inflation is projected to drop to 11.85% in March, a Reuters poll showed, while economists polled by the state-run Anadolu Agency expect it to come in at 11.81%. The median estimate of 14 economists in a Reuters poll stood at 11.85% for March YoY inflation (0.55% MoM), with forecasts ranging between 12.34% and 11.30%. A group of 14 economists polled by AA said they expect monthly inflation to average 0.53%, with estimates ranging between 0.10% and 1%. Recall, the consumer price inflation rose less than expected to 12.37% YoY in February with a 0.35% MoM rise .
The sharp fall in oil prices has been main driver for positive expectations in March CPI data, which on the other hand pointed to potential economic damage from the coronavirus pandemic. While the possibility of reaching single-digit inflation in the second half of the year continues when taking into consideration the central bank’s guidance, the decline in oil prices and slowdown in economic activity could contribute to this. In this regard, the median estimate of 11 respondents for inflation at year-end was 9.6%, slightly lower than a previous Reuters poll. Forecasts this month ranged between 10.40% and 7.50%. According to the state-run AA survey, year-end inflation is projected to reach 9.12%, with the lowest estimate at 7.5% and the highest at 10%. To remind, in the minutes of the March monetary policy meeting, the central bank said the sharp fall in international commodity prices, particularly in crude oil and metal prices, affects the inflation outlook favourably, despite the recent depreciation of the lira. The government’s year-end inflation target is 8.5% for 2020.
(+) Exports up 2.3% to USD14.65bn in February… Turkey’s exports increased by 2.3% YoY in February to reach USD14.65bn. The country’s imports also increased by 9.8% YoY to stand at USD17.63bn in February. The trade deficit was USD2.98b in February, up 72% compared to the same month last year. In February 2020, exports-to-imports coverage ratio was 83.1% while it was 89.2% in February 2019. The manufacturing sector’s share of exports was 95%, while agriculture, forestry and fishing’s share was 3.2%, and mining and quarrying’s share was 1.2%. The share of high-tech products was up by 0.1 percentage points to reach 3.4% of manufacturing industries exports and dropped by 1 percentage point to 12.9% of imports, year-on-year in February. In February, intermediate goods took the lion’s share, with 76.2% of overall exports, followed by capital goods at 12.4% and consumption goods at 11.1%.
In February, Germany remained Turkey’s largest export destination, with exports totalling USD1.34bn. Iraq, the United Kingdom, Italy and the United States were other large export destinations with USD906mn, USD857mn, USD766mn and USD740mn, respectively. Russia was the main source of Turkey’s imports last month with USD1.71bn, followed by China with USD1.7bn, Germany with USD1.6bn, the U.S. with USD1.13bn, and Iraq with USD750mn.
(-) Turkey’s electricity demand falls as coronavirus constricts economic activity… The reduced social and economic activity caused by the coronavirus pandemic has decreased Turkey’s electricity demand and is likely to cause a drop in its trade volume. Although Turkey has not enforced a nationwide lockdown, the economic activities in the country declined sharply after the government ordered the closure of restaurants, cafes and other small businesses, while grocery stores and pharmacies remain open. The precautions taken to curb the COVID-19 outbreak have started to lower Turkey’s power demand and electricity trade volume, as people are generally staying at and working from home. Turkey’s electricity production hit the lowest level on Sunday at around 651,000 megawatt-hours, marking a nearly 5% decrease compared with the corresponding day last year. A sharp decline in Turkey’s power demand has a lowering impact on energy prices due to oversupply of electricity. Note that Turkey’s installed power capacity stood at 91 gigawatts by the end of 2019. It is very likely that the COVID-19 pandemic will decrease electricity demand in the mid-term.
Reduction in overall demand was also reflected on Turkey’s energy import bill. The overall energy imports decreased by 7.4% to USD3.13bn in February compared with the same month in 2019, which accounted for 17.8% of the overall import figures, according to data released by the Turkish Statistical Institute on Tuesday. The most significant decrease took place in crude oil purchases with Turkey importing approximately 2.32 million tons of crude oil in February, down from 2.34 million tons in the same period last year. Meanwhile, Turkey’s Energy Exchange Istanbul (EXIST) trade volume in spot natural gas market performed much better than other energy markets, hitting a record high for 2020 on Monday. Total trade on Monday amounted to 21.59 million liras, marking a hefty 384% increase over the previous day. On Monday's spot market, 1,000 cubic meters of natural gas cost 1,441 liras, while the total natural gas trade volume amounted to 14.97 million cubic meters. Turkey received 117.9 million cubic meters of pipeline gas on Monday.
(=) Turkey’s foreign debt stock totals USD436.9bn by the end-2019… Turkey’s gross external debt stock totalled USD436.9bn at the end of 2019. The figure was 58% of GDP last year. The country’s net foreign debt totalled USD244.6bn as of Dec. 31, accounting for 32.5% of its GDP. Treasury guaranteed foreign debt stock was USD14.3bn as of end-December. EU-defined general government debt stock amounted to TRY1.4tln (USD238.3bn), or 33.1% of GDP at the end of last year. The public net debt stock reached TRY693.1bn (USD116.5bn) in the same period.

Sector and Company News:

(-) TOASO will halt production at its plants for two weeks starting from April 3, 2020 due to negative impacts of Covid-19 on supply chain and deliveries.

(=) ULKER participated in the capital increase of G New Inc, an investment company,. with USD 59mn. After the capital increase, Ulker's share in G New Inc. increased from 12.20% to 18.35%.

(=/-) ARCLK is to halt production in Pakistan, Bangladesh, South Africa and Russia as the authorities declaring curfews in the context of combating the Covid 19 epidemic. The impact of suspending production in these countries temporarily on Company’s financials is limited. Curfews are expected to continue until April 5 in Bangladesh, April 6 in Russia and April 17 in South Africa. Sales portion of these countries constitutes around low teens of ARCLK’s consolidated sales in 2019.

YUNSA In order to increase liquidity in the medium and long term, YUNSA decided to sell its machines to Ziraat Katilim (a participation bank) with the Sell and Lease Back method.

BFREN extended production halt to April 13 from April 6.

DENCM, a subsidiary of Pasabahce Glassware (SISE has 99.5% of Pasabahce), decided to halt production in Furnace No. II as of March 30 and to make the required production in Furnace No I.

VAKKO stopped its e-commerce activities starting from March 31, following the decision to temporarily close its stores since March 19 due to Covid 19.

Botas announced 2Q20 natural gas tariffs... According to Botas’ web-site, the state-run natural gas distributor Botas will keep natural gas tariffs unchanged for households, industry, and manufacturing.

(=) HALKB trial was held in Southern New York Court by teleconference on Tuesday. The new attorney of the bank requested for 90 days of delay in order to have a better preparation such as visiting top management in Turkey amid Covid-19 measures. The judge postponed the next hearing to June 9,2020. Recall that the bank had requested to be investigated in a privileged status and both primary and court of appeals had declined this request. The trial that was held yesterday has been the first hearing that Halkbank participated.
(+) The CBRT rolls out new rescue measures amid pandemic… The CBRT on Tuesday introduced new measures and provided more stimulus for the financial sector and economy, saying it would ramp up government debt buying and offer new pools of cheap funding to stem the fallout from the growing coronavirus outbreak. The steps aim to back monetary transmission mechanisms, increase banks’ flexibility in liquidity management and allow for uninterrupted credit flows to the corporate sector and firms exporting goods and services.
Recall, as coronavirus cases have surged in Turkey, the government has so far offered TRY100bn (USD15.2bn) in fiscal support, and the central bank has already cut its key interest rate by 100 basis points, loosened reserve requirements and offered cheap lira liquidity. In recent days, the central bank’s governor and a deputy have stressed publicly that they can act quickly and strongly to further backstop financial markets and the economy. Under the latest emergency measures, primary dealers will for a temporary period sell the central bank debt they purchased from the Unemployment Insurance Fund.
In this regard, the central bank had extended TRY60bn worth of rediscounted credits and added more lending options well below its 9.75% policy rate to provide much-needed credit to companies and liquidity to government debt markets.
Recently the bank has come up with new set of measures. Firstly, outright asset purchases can be carried out in a front-loaded manner, and these limits may be revised depending on the market conditions. Secondly, the actions aimed to enhance the effectiveness of the monetary transmission mechanism via increasing the market depth, enabling sound asset pricing and providing banks with flexibility. Thirdly, the Bank will hold swap auctions with six-month maturities for the lira against dollars, euros or gold at an interest rate of 125 basis points lower than the policy rate. Fourthly, for FX operations, lenders can now use mortgage- and asset-backed securities as collateral.
Aforementioned moves were in line with those of other countries aiming to support their economies going into a global recession. Despite the outbreak, the CBRT expects a strong growth rate in the first quarter thanks to a strong January and February, its deputy governor said on Sunday, stressing that there were no noticeable signs of weakening consumption, apart from travel spending.