Turkey is seeking a loan from the IMF after a recent period of financial disturbance, which saw inte...
Turkey is seeking a loan from the IMF after a recent period of financial disturbance, which saw interest rates climb as high as 300%.
The crisis occurred after 10 small to medium-sized Turkish banks went insolvent. The central bank said that it would investigate the banks for criminal activity.
Ashok Shah, head of emerging markets equities at Old Mutual Asset Management, notes that the central bank has tried to inject some liquidity into the market, to impose some discipline and bring interest rates down but it has not worked.
"It has reached the stage where the central bank is trying to establish some confidence, if this fails then interest rates will remain sky high and the economy will perform poorly next year," Shah says. "It will only be able to restore confidence if Turkey sticks to the IMF package. The currency may need to be devalued as well."
According to Leila Kardouche, emerging markets fund manager at Schroders, there is a lack of confidence in the Turkish government for a number of reasons.
It has been stalling proceedings with structural reforms in order for the IMF to disburse further loans.
The government has also been dragging its feet about handing over management rights in Turk Telekom which was due to be privatised in the summer but in the end was not due to lack of interest.
The government has also delayed the passing of legislation to allow for commercialisation of state banks.
"These factors raised eyebrows at the IMF," Kardouche says. "The feeling was that Turkey was being too slow and the IMF would hold back funds that it was going to disburse."
Kardouche believes the Turkish situation will soon stabilise and that there will not be a run on the banks. Schroders has marginally reduced its exposure to Turkey but still believes it is an exciting long-term story, albeit a volatile market.
"We are not taking a positive or negative bet on Turkey because it is not clear what will happen over the next few months," says Kardouche. "We are happy to be neutral. There may be an opportunity to take a more aggressive position but there are risks that Turkey will devalue."
Schroders had been favouring consumer stocks earlier in the year when there were lower interest rates and it was thought that there would be a consumer boom. It is now looking to reduce some of its exposure to the sector.
It is less positive on banks than earlier in the year but Kardouche thinks they will probably perform reasonably going forward. According to Shah, the problem with the banking sector is that it is too crowded.
"There are around 80 banks in Turkey for a population of around 65 million, which is too much, it could do with around 10," he says. "Some banks are just too small or not financially viable. The central bank has to allow some rationalisation of the banking system, which is what the IMF wants."
Old Mutual has holdings in Turkish retailers, banks, including Isbank, Yapi Bank and Garanti Bank and telecoms, including Netas Telekom, which manufactures telecommunications equipment.
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