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Banks

Turkey finance minister's reassurances win cautious welcome from investors

LONDON (Reuters) - Nervous investors gave a cautious thumbs-up on Thursday to a carefully choreographed presentation by Turkey’s new finance minister, Berat Albayrak, after he promised not to bring in capital controls in response to its currency crisis.

FILE PHOTO: Turkish Treasury and Finance Minister Berat Albayrak speaks during a presentation to announce his economic policy in Istanbul, Turkey August 10, 2018. REUTERS/Murad Sezer/File Photo

Both the lira and Turkey’s government and bank bonds extended gains they had made in the run-up to the conference call presentation, which lasted roughly 45 minutes and provided replies to a handful of pre-approved investor questions.

Albayrak’s main message was, unsurprisingly, that a recent 40 percent rout in the lira was unwarranted. But he also tried to douse fears about Turkey’s banks and stressed that the government had options if the turmoil reignited.

“What was really assuring, and which he stressed in a number of different ways, was that capital controls will never be on Turkey’s agenda,” said State Street’s lead EM portfolio manager, Abhishek Kumar.

That had been the biggest concern for investors. Capital controls would not just impact on any Turkish investors but would also damage the European Union due to Turkey’s proximity and its strong trade and banking links to the bloc, Kumar said.

Albayrak’s remarks also included commitments to shore up banks if required and to hold regular calls or meetings with foreign investors.

Albayrak, who is President Tayyip Erdogan’s son-in-law, was named finance minister just over a month ago and is a relative unknown for international investors, who fear Turkey’s economy is increasingly hostage to political interference.

The lira has lost nearly 40 percent against the dollar this year, and tumbled to a record low of 7.24 on Monday, fueled in part by Erdogan’s relentless calls for lower interest rates despite soaring inflation. The slump has also led to fears of contagion across emerging markets.

LIRA, DEBT RALLY

Almost an hour after Albayrak's call the lira was more than 25 percent off its low and was up 5 percent on the day at 5.71 per dollar. TRYTOM=D3

Turkey's dollar-denominated government bonds rallied hard as well. They were up as much as 3 cents in the dollar US900123BJ84=TE and currency market implied volatility gauges had also dropped back. TRY3MO=FNTRYSWO=FN

“Considering this was his first call with investors, it went okay, said M&G fund manager Claudia Calich. “He didn’t demonize investors or use an antagonistic tone,” she said, noting Erdogan had spoken of an “economic war” being waged against the country.

However, there were still some signs of heavy stress. The price of insuring against a default on Turkey’s government debt in the next year using credit default swaps (CDS) was higher than the price of doing so for five years.

That CDS ‘curve inversion’ as it is dubbed in financial market jargon, generally happens in times of acute turmoil. Pakistan’s curve has inverted in the past during various crises that have tended to require International Monetary Fund support.

“We have no engagements with the IMF” apart from the regular monitoring missions, Albayrak said on his conference call.

Additional reporting by Karin Strohecker and Claire Milhench in London; Editing by Gareth Jones

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