Coronavirus Update Spotlight on Turkey
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The Institutional Investor survey is important to us. We would appreciate your vote. Charles Robertson +44 (207) 005-7824 [email protected] Daniel Salter +44 (207) 005-7835 [email protected] Metin Esendal +44 (207) 005-7925 [email protected] Vikram Lopez +44 (207) 005-7824 [email protected] Coronavirus update Spotlight on Turkey We are inclined to agree with the IMF’s forecasts of -5% GDP in 2020, but hope for a better upturn to c. 6% (IMF forecasts 5%) in Report date: 17 April 2020 2021. We differ more on the current account (C/A) as we are concerned that exports of services will plunge from $65bn in 2019 to $40bn in 2020, as tourism is wiped out for at least two Figure 1: MSCI EM country performance since 17 Jan quarters. We would turn a little more optimistic if Turkey can Performance, $ Turkey 0% slash active coronavirus cases from 71 per 100,000 (the second -5% highest in emerging markets – EM) to 5-10 like Korea. -10% -15% Currency cheap, but downside risks -20% -25% -30% The lira is the second-cheapest currency in EM. We believe it is about 25% -35% undervalued and forecast 10% rebound potential in a positive scenario to TRY6.3/$. -40% We think there is also a pessimistic scenario where it breaches its record low of -45% TRY7.5/$, in today’s money, which was seen in 2018. Turkey, unlike South Africa -50% EM UAE Peru India Chile Qatar Brazil Egypt China Korea Czech Turkey Russia Poland (SA), is not engaging with the IMF. Default fears are in the air yet again. Turkey Mexico Taiwan Greece SAfrica Hungary Pakistan Thailand Malaysia Colombia Argentina Indonesia might be the only EM in 2020 to have to hike rates to defend its currency. Our base Philippines SaudiArabia case is the lira returns to TRY6.5/$ by December. Source: Bloomberg Underweight equities, stay defensive Figure 2: EM 10yr $ bonds, yields and change Turkish equities are undoubtedly cheap. But in our view Turkey needs more than Current valuation to make the equity market re-rate. And with foreign reserves continuing to 1w decline, we believe a policy response will be required for Turkish equities to rebound 31-Dec-19 YtD change in yields, bpts (RHS) convincingly. That response might need to come sooner rather than later. Over the 12 400 longer term, to become more than a trading market, we reiterate our long-held stance 10 that we need to see fundamental changes to the Turkish economic model that can 300 8 allow for sustainable long-term growth of dollar GDP per capita, something that has 200 6 been lacking over the last decade, in our view. For now, we believe that an 100 4 underweight stance and defensive portfolio are best for Turkey. 2 0 Base case picks – SOKM, MPARK, PETKM, TCELL / TTKOM 0 -100 Peru Chile Brazil Egypt Korea Russia Turkey Mexico V-shaped recovery picks – SAHOL, PGSUS, TAVHL Colombia Indonesia Philippines South Africa South Saudi Arabia Saudi Prolonged downturn picks – BIM, ULKER, TCELL / TTKOM Source: Bloomberg Important disclosures are found at the Disclosures Appendix. Communicated by Renaissance Securities (Cyprus) Limited, regulated by the Cyprus Securities & Exchange Commission, which together with non-US affiliates operates outside of the USA under the brand name of Renaissance Capital. Renaissance Capital Macro 17 April 2020 Coronavirus update – Turkey We do not take great issue with the IMF’s GDP forecasts for Turkey of -5% in 2020. Assuming 7-9% YoY falls in household consumption in 2Q-3Q20 and fixed capital formation dropping 20% YoY produces a figure of -4.8% in our model. We do pencil in a rebound to 6.2% in 2021, against the IMF’s 5.0%. The economy was in need of a 2020 rebound. The workforce apparently shrank from 31.8mn to 31.6mn in the year to January 2020, even though 1mn join the workforce each year. The labour force participation ratio fell from 52.5% to 51.0% over the previous year (EU norms are over 70%) and the employment rate had fallen from 44.5% to 44% (27.2mn). Most of the fall in unemployment from 14.7% to 13.8% was due to a shrinking workforce. Little wonder that President Recep Tayyip Erdoğan wants to see growth in bank lending, and a cheap currency, in the hope of creating jobs. It is unfortunate that the tourism industry has evaporated in the past two months. Accommodation and food service employment rose from 1.48mn in January 2019 to 1.833mn in July 2019, which we assume is tourism related. About 350,000 seasonal tourist jobs will probably not happen in 2020. The January 2020 employment in this sector was up to 1.57mn and some of those jobs are likely to have gone as well. We assume at least a temporary hit to some of the 5mn manufacturing jobs. We have already seen car sales collapse in Western Europe. In 2019, 15% ($26bn) of Turkey’s exports were vehicles, 5% machinery and 4% refined oil – all of which will be negatively affected in 2Q20. About 20% of imports ($41bn) was mineral fuels (oil and gas) and we can discount perhaps a quarter of that (the gas price agreed with Russia is not transparent and might be fixed). Travel receipts were $30bn in 2019 (the net surplus was $26bn) including $7bn in 2Q19 and $12bn in 3Q19. Transport passenger receipts were another $13bn, including $3bn in 2Q19 and $4bn in 3Q19. Therefore, on our calculations, $10bn is already gone for 2Q20 and another $16bn for 3Q20 is in jeopardy and we think very likely to go as well. So, we are inclined to a little more pessimism on the C/A than the IMF. It projects a surplus of 1.1% of GDP shrinking gradually to 0.4% in 2020, while we see a swing to a 1% of GDP deficit, thanks to services revenues shrinking from $65bn in 2019 to $40bn in 2020 (then rebounding to $64bn in 2021). Figure 3: Turkey – IMF forecasts 2018 2019 2020 2021 2022 Real GDP (% YoY) – Apr 2020 2.8 0.9 -5.0 5.0 3.0 Inflation, End of period (% YoY) – Apr 2020 20.3 11.8 12.0 12.0 11.0 Current account balance (% GDP) – Apr 2020 -2.7 1.1 0.4 -0.2 -1.8 Government primary net lending/borrowing, % GDP -1.6 -2.8 -2.5 -2.5 -2.5 Government net lending/borrowing, % GDP – Apr 2020 -3.7 -5.3 -7.5 -6.7 -5.1 Government gross debt, % GDP 30.2 30.1 30.8 31.7 32.9 Source: IMF April 2020 WEO Virus Turkey is the second-worst hit EM at present, with 71 active cases (confirmed cases minus deaths and recovered) per 100,000 people. While it closed schools, restaurants and bars on 17 March, it kept mosques open – even though religious gatherings have been responsible for outbreaks in other countries. The elderly were told to stay at home on 21 March, and international flights were banned on 27 March. Then the young were told to stay at home too. A curfew was introduced around 10 April and has since been extended. But Turkey has resisted a full lockdown and as far as we are aware, there is only one country with more cases per capita that has done similar, which is Sweden. The recent peak in new daily cases was 8 April in Sweden and 11 April in Turkey, but we cannot be confident that either peak will last. It is possible, but we just have no proof it will last. 2 Renaissance Capital 17 April 2020 Coronavirus update – Turkey Figure 4: Active coronavirus cases per 100,000 people as of 14 April 2020 (blue emerging markets, orange CIS countries, green African countries) Ireland 229 Active coronavirus cases per 100k, Johns Hopkins data via Renaissance Capital Iceland 208 07-Apr 14-Apr Spain 188 175 180 172 This excludes a number of micro or less 162 161 market relevant states. San Marino is top, 160 152 with 806 cases per 100k people Germany's well -resouced health system was not 142 140 overwhelmed at a peak of 88 cases per 100k 128 123 119 Hubei's system was overwhelmed at 86 (excludes 120 108 108 those without symptoms 96 100 94 Korea's health system was not overwhelmed 79 at a peak of 15 cases per 100k 72 71 71 80 69 64 63 58 50 50 60 50 49 48 46 38 37 37 34 33 33 40 31 29 28 28 28 26 26 25 23 22 21 20 0 US UK Iran Italy UAE Peru Chile Switz Israel Qatar Spain Latvia Serbia Kuwait Turkey Ireland Austria France Cyprus Croatia Iceland Finland Estonia Djibouti Norway Belarus Bahrain Canada Belgium Sweden Czechia Armenia Portugal Panama Ecuador Moldova Slovenia N N Maced Romania Lithuania Denmark H Bosnia Mauritius Germany Singapore Netherlands Dominican Republic Dominican Source: Johns Hopkins, IMF, Renaissance Capital We think that medium-term suppression of the virus might allow an economy to function relatively normally (e.g. with temperature checks at every supermarket, restaurant and bar) at around 5-10 cases per 100,000 people. This is where Korea has capped cases in the past week or so. Until Turkey can convince the rest of the world that the virus is suppressed, our concern is that it will be out of bounds to most tourists globally. It will not be a surprise if the EU and other governments insist that visitors to a country where the virus is not obviously suppressed will be told to quarantine for two weeks at home.