ETFs providing exposure to Turkish equities crashed during trading on Monday 22 March, following President Recep Tayyip Erdoğan’s unexpected dismissal of central bank governor Naci Agbal.
Naci Agbal was ousted as central bank governor in a shock move last week.
Agbal was fired late on Friday with investors and analysts waiting through the weekend until markets opened on Monday to gauge the initial impact of President Erdoğan’s political maneuver.
The Turkish lira opened 8.9% down against the US dollar before regaining some ground during the day, while the Turkish stock market also plunged lower with the benchmark Borsa Istanbul 100 sinking by nearly 10%.
The effect on Turkish equity ETFs, which trade in major currencies and, therefore, suffered both the equity crash and a foreign exchange impact, was seismic.
The US-listed iShares MSCI Turkey ETF (TUR US), which housed $338 million in assets on Friday, tumbled 17.3% in US dollar terms on Monday, wiping out all gains made in the past few months and putting the fund down 11.3% year-to-date. TUR tracks the MSCI Turkey IMI 25/50 Index which provides market-cap-weighted exposure to large, mid, and small-cap Turkish equities.
The three Turkish equity ETFs listed in Europe, each of which is linked to the same MSCI index or slight variations of it, suffered a similar fate. They are the $100m iShares MSCI Turkey UCITS ETF (IDTK LN), the $60m Lyxor MSCI Turkey UCITS ETF (TURU LN), and the $9m HSBC MSCI Turkey UCITS ETF (HTRD LN). The funds’ US dollar, pound sterling, and euro share classes all dropped by approximately 17.3% during Monday’s trading.
A step too far
Turkey is not unaccustomed to political and economic turmoil as the country has been dealing with crises in both areas for years. Having survived a coup attempt in June 2016, President Erdoğan declared a state of emergency and has since systematically moved the country away from a parliamentary democracy and towards an executive Presidency.
President Erdoğan’s power grab, which extended into the central bank, led to several economic instabilities including soaring inflation and a currency crisis in 2018.
The November appointment of Agbal, who became the third Turkish central bank governor within two years, was cheered by investors as marking a return to orthodox monetary policy. Under Agbal’s stewardship, in an effort to combat inflation of approximately 15% in the country, Turkey’s central bank embarked on a series of interest rate increases that lifted the key rate from 10.25% in November to 19% on the day before Agbal’s dismissal.
President Erdoğan, however, has always touted an unorthodox monetary policy stance, claiming that increasing interest rates leads to higher inflation, a view not shared by most economists. Many critics have attributed his stance to sheer political calculation, arguing that President Erdoğan is merely seeking to buffer his popularity by boosting growth through low interest rates, regardless of their sustainability and long-term impact on the economy.
Agbal’s replacement is Sahap Kavioglu, a banking professor, Erdoğan ally, and outspoken critic of orthodox monetary policy, who is expected to follow the government directive to keep interest rates low.
The drastic moves in Turkey’s equity and currency markets highlight investors’ concerns over the independence of Turkey’s central bank and the risk of out-of-control inflation and another currency crisis, especially considering Turkey has used up most of its foreign reserves by previously supporting the Turkish lira during periods of low interest rates. For many investors, the ousting of Agbal appears to be a step too far.
Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy at VanEck, explains: “What happened is not a simple personnel change, the central bank’s shakeup means that the much-touted orthodox policy U-turn is over (maybe not for good, but for a long time for sure). This brings back concerns about restrictions on FX transactions, falling reserves, dollarization, early elections, etc, etc, etc. Worst of all, it confirms that Turkey’s economic policy depends on the whim of just one person – President Tayyip Erdoğan.”