Turkish Shareholders Association Plans to Sue the Turkish Central Bank

If you think that the closure case filed by the Judiciary’s top prosecutor against the current ruling party of Turkey, AKP, is hot stuff, clearly you have seen or experienced nothing when it comes to Turkish internal affairs.

First, I would like to make a civil statement due to hypocritical attitudes of certain European deputies who won’t miss an opportunity to criticize Turkey. The alleged concern here is that the Turkish Judiciary is “overstepping” into the Turkish political process.

So monitoring the elected officials to make sure that they are not above the law is considered “overstepping”? Europeans have given a whole new meaning to the necessary checks and balances to maintain a democratic system. I was under the impression that the Judiciary in all democratic countries should be independent from the Legislative and Executive Branches of the Government and that the Judiciary in all true democracies must retain the power to indict or prosecute elected officials, to make sure that they are not above the laws and the constitution governing the country over which they preside.

Thus, the fact that AKP has been elected by 47% of the electorate with a promise to “unite” the country is irrelevant in determining whether this party has shown utter contempt and disrespect for the remaining 53% after the elections.

Of course, this is a forum focused on the investment climate of countries and the companies therein. So is the rest of my writing.

I have consistently pounded the table with the view that Turkish economic problems are based on fundamental economic shortcomings of the country, rather than the many “uncertainties” injected into the marketplace over political or legal maneuverings of many players. Of course, it is these “players” themselves that brilliantly accomplish the task of making consistent and sustainable growth unattainable in Turkey.

Turkish economic environment is rendered hostile to entrepreneurial activities and job creation via interest rates that are held artificially high by a Central Bank that colludes with the ruling AKP government in defending an already over-valued exchange rate. I wrote the following in an article published at Seeking Alpha over a year ago:

Unfortunately, the Central Bank has decided that currency stability is the best way to ensure economic stability, which means keeping the currency at its present overvalued level, even if it means defending it by further raising interest rates. Needless to say, the overvalued currency has stifled domestic production and suppressed manufacturing capacity vis-à-vis international competitors. High real interest rates have crowded out private investment of individual firms as well lowering the valuation their stocks. How could the stock market thrive for the longer term, given the business and entrepreneurial environment that seems so hostile for Turkish companies?

All of this is supposedly done in order to prevent importing of inflation in a possible devaluation scenario, which is an argument that’s becoming increasingly difficult to tout and to digest.

The real problem with a possible currency devaluation is the fact that the recent country growth rates registered in dollar terms will look a lot less impressive when the Turkish Lira is allowed to float towards what its value was six years ago in purchasing power parity terms. Such currency adjustment will make the economic achievements of the AKP Administration look a lot less impressive. Monetary investments indexed to the Turkish Lira will also be hurt. So there are many incentives for politically concerned parties as well as investors to see to it that the Central Bank keeps defending the overvalued exchange rate in a so-called “inflation-targeting” program.

But these incentives will save the day and help our wallets at the expense of long-term economic development of the country. The overvalued currency has stifled the competitive status of local firms by suppressing exports and encouraging cheap imports, hence causing massive trade deficits. High interest rates offered to ensure the capital inflows to finance the deficit remain an impediment to sustainable growth.

Unfortunately, the conventional thinking amongst financial circles in Turkey has been about maintaining an illusion of “stability” with an ever-strengthening exchange rate at the expense of competitive status of firms and new investment. I wrote another article on Seeking Alpha commenting (or complaining, rather) about the following:

Turkish monetary authorities are willing to engage in more rate hikes if global selling waves start pressuring the overvalued currency. Recent CPI and PPI figures have shown that doing so does not succeed in reducing inflation. At whose expense and for how long they can sustain such disequilibria are questions that beg to be answered.

And guess what the Turkish Central Bank did in the face of the recent global mortgage crisis? It has raised its overnight rates for a total of 150 points since February as selling pressures mounted on emerging market currencies in general, raising its rate of borrowing to 16.25% and lending to 20.25%. Given current annual nominal interest rates of around 22% and real rates of 12-14% depending on the level of inflation, no investor in their right mind would prefer to invest in the stock market or even in a new business that has the slightest uncertainty of returning less than the available risk free rate. Furthermore, the Central Bank has signaled at more rate hikes if necessary.

Thankfully, it turns out that I’m not the only one who feels that this is a “bad” thing. In fact, the more I look to the domestic scene, the more people I see raising their voices in discontent, including, but not limited to, local and national manufacturers, industrial and commercial associations as well as various commerce chambers and export organizations.

The Turkish Shareholders Association, which was founded in 2001 in order to defend shareholder rights and promote investment in stock market, announced plans to bring a lawsuit against the Turkish Central Bank regarding its recent decisions to aggressively raise interest rates in the aftermath of the global mortgage crisis and liquidity meltdown.  

The English version of the Shareholders Association web page mentions nothing about the news. Perhaps they don’t want to appear as if fear-mongering to the outside investors. In fact, this news didn’t even get properly disseminated into the mainstream Turkish media in its Turkish version, because of the prevailing fear that foreign investors as well as domestic ones could decide to withdraw their funds in panic and hence create a massive outflow from the pool of “hot-money” engulfing Turkish markets that is well over a hundred billion dollars and counting.

But I insist that as long as we have a Central Bank who guarantees the kinds of rates that are unavailable anywhere else around the world, it is very difficult indeed to create such a capital flight with “fear-mongering” articles of mine or with “obscure” news of some arcane shareholder association lawsuit against the Central Bank’s rate decisions.

Let me translate – roughly - what I read in the Turkish version of the association’s web page:

The president of the Turkish Shareholders Association, Ali Bahçuvan, announces the following: “For the first time in Turkish history, we will apply – in shame - to the courts to start the Judicial Procedures towards regulating the accountability of Central Bank’s rate decisions.” Ali Bahçuvan asserts that the Central Bank’s primary duty should be to provide for economic growth via regulating interest rates.

Bahçuvan gives the example of the Fed for this purpose. He asserts that the first priority of the Fed is to promote growth. The Fed achieves that via lowering interest rates at the first sign of trouble in order to ensure liquidity to global markets. Money can thus continue flowing into investments and private enterprise without any impediments, hence the availability of cheap credit, and along with it availability of jobs as well as longer-term growth is ensured.

American investors are very familiar with that line of thinking. Worrying about inflation has been a secondary concern for the Fed, unlike the European Central Bank. Regarding inflationary concerns, Bahçuvan asserts that Turkey is already importing inflation in terms of oil, energy and food, and makes the point that raising interest rates also raises the costs of doing business because of expensive credit, hence exacerbating inflationary pressures within the economy.

Bahçuvan vehemently makes the point that they are “not happy” about filing the suit, while stating that they along with many other concerned parties have warned the Central Bank many times regarding the aggressive rate hikes, yet the Central Bank’s explanations to the public has been less than satisfactory. The association is especially worried that the Central Bank could engage in more reactionary hikes of 300 basis points or more and hopes that such a lawsuit could remind them of their accountability to the general public. Also, such a lawsuit could force the bank to account for its conduct as well as force them to take into consideration valuable economic opinions that disagree with their current monetary policy. 

Furthermore, should the courts decide against the Central Bank’s policies, there will be an opportunity for injured parties to demand payments, which, Bahçuvan states, will be the first case of its kind in the world.

I don’t see why one should feel “embarrassed” to take such a loan sharking Central Bank to court. Should one be ashamed to seek justice? Or is it the common fear of a potential flight of “hot money” that is sending shivers down the spines of many that requires such loan sharking activities on the part of a Central Bank to maintain “stability”? And hence making the rest of us less willing to ask for “accountability”?

Comments

[CuriousInvestor]

As an American investor in Turkish stocks, I find it repugnant that the anti-AK Party elements in the country (the same corrupt elements that have had a monopoly on power post-Kemal and left the economy in tatters) are now using their influence with the judiciary to overturn the party that has won multiple elections and is the reason why Turkey (until the last few months) has been an economic/financial superstar.

My Turkish investments are down 50% from their highs last year because of these anti-AK Party minions. They failed in the elections, they failed in pursuing a military coup d'etat, and now their using partisan Supreme Court to overturn the hugely popular and successful AK Party. The political instability is responsible for the poor performance of the stock market, otherwise Turkish stocks would be performing on par or better than Russia and the Gulf countries. If there's any justice in Turkey, the AK Party will be left alone to steer the country to prosperity, as it has successfully done for the last several years.

[Suna Reyent]

Yes, investments in Turkish stocks are down from their highs significantly. But let's not forget that the entire global market is down and a lot of investors have suffered losses from their highs attained by the end of last year.

Turkish market shows a high degree of correlation with the American stock market, but the beta of the Turkish stock market is probably even higher - which means that if American stocks are making money, Turkish stocks are probably making twice as much.

But the reverse is true as well. There is an old saying in trading, "If it looks unreal, it probably is".

Maybe THAT's the time to take profits.

If one is unwilling to take profits because they think they can ride them even higher, they will be disappointed and there won't always be a pro-Kemalist or anti-AKP element to blame for the sorry performance. However, if one would like to be a successful long-term investor and never sell, one will need to look at fundamentals. And the fundamentals of the Turkish economy indicate a hostile environment for the stock market. No stock market can perform well for the long term given real interest rates this high. This is a rule just like the laws of gravitation in Newtonian physics.

Steer the country to prosperity? Good things have happened in Turkey and I can admit to that, impressive growth has been registered since the 2001-2002 crisis, but let's not forget that this growth was registered from very low bases. Then this growth has been maintained by steering the country into an import dependent growth model where expensive local currency has facilitated buying power for the economy, thus causing massive trade deficits that needed to be financed by continuous flow of money, hence creating the need for very high interest rates. This is not an export-oriented growth model experienced once by Germany, Japan, then by the Asian tigers, and now by China. It is not sustainable and does not create new jobs because it does not encourage local investments and production.

Comparison to Russia and Gulf countries does not even begin to make sense because these countries are key exporters of oil. The current global environment helps them tremendously. Turkey got lucky till the end of 2007 because of the positive overall economic environment and ample liquidity in the global markets, but now it gets double and triple slammed not only because of the current liquidity meltdown, but also because of increase in energy prices as an exporter of oil as well.

AKP took credit for a lot of good things that happened beyond their control, but now they are passing the blame onto others when their good fortunes finally turn around. True prosperity and long term growth will be attained when the country finally realizes that it needs to follow an export-oriented approach just like all the rest of the countries that successfully followed a path to sustainable development.

[Suna Reyent]

Correction: Turkey gets slammed because of increase in energy prices as an IMPORTER of oil.

[CuriousInvestor]

While I do appreciate your economic point (though I vehemently
disagree with your politics), an export-led model and low interest rates is not a cure-all, as Japan for the past 20 years illustrates. The world's largest exporter, Germany, is also a less than sterling poster-child for that type of economy going forward. And China, while a fantastic story on many levels, has had growth come at extraordinary costs that no democratic country would be willing to bear in the short-term. It's very telling that China has been emphasizing its domestic economy more and more this decade, sacrificing or de-emphasizing export competitiveness (increasing interest rates, reserve ratios, etc.).

The most suitable economic strategy, as AKP has tried, is to put money and tools in the pockets of the average Turk, both by encouraging consumption through fiscal measures and encouraging savings/investment through monetary measures. It's a very delicate and remarkable balance that Turkey has been able to maintain for most of this decade under AKP stewardship.

As far as I'm aware, exports have shown respectable upticks during the AKP tenure. The external debt has been trending downward. The percentage of foreign-ownership of Turkish equity market has also gotten smaller. Sure, there are more reforms necessary, but Turkey is climbing out of a bottom made my so-called "secular" parties of the past, the same ones now trying by hook or by crook to regain power.

Turkey does not need to be commodity-rich like many of the Gulf and former Soviet Asian states to experience similar or sustained growth given its strategic location, connections to the economically burgeoning Islamic world (Islamic finance and food are great growth opportunities), and demographically young and large population. The Turkish government needs to remain the course and it'll do fine. Rampant hyperinflation, humiliating currency devaluations and stagnant growth need to be left back in the "secular" past. Lowering interest rates in a race-to-the-bottom does not serve Turkey's short or long-term interest. The US is already considering reversing its recent interest rate cuts. Inflation has already taken hold in food and fuel around the world. Turkey being a net fuel importer, by your own admission, is a point against lowering interest rates.

And, by the way, most of the accessible investments in the Gulf (or any other oil-rich country or region) are not in the energy sector and they have performed extremely well. TRAMX is up over 35% since its inception less than a year ago.

I have a longterm perspective on Turkey. I think it offers a tremendous growth play, but only if the AKP is at the political reigns. Every time Turkey ousts an alleged "Islamist" party, the government that follows takes the country down the wrong path (especially economically).

[Suna Reyent]

You are saying that the export-oriented growth models are no longer working for Germany and Japan, but the fact of the matter is that's how they once GREW from being small economic players to two of the world's most significant economic powers. So while an export-oriented growth model could not help these countries grow indefinitely because they cannot keep exporting more products to Mars, for instance, it helped them establish themselves as major players in the global economic scene.

The relatively bloated Japan and Germany of today experience quite different dynamics from the once lean and mean export-oriented machines they were. Turkey first needs to register some significant growth similar to the Asian tigers, for instance, before we can ignore or snub an export-oriented growth model for the country. An export oriented model has been the norm for every other country that has experienced successful development, without depending upon much bigger and richer countries to "digest" their economies.

Note: By those countries I'm referring to some of the "little" countries that joined the European Union and were economically and socially "digested" by it, for better or worse. But those countries house a lot smaller populations than a 70-75 million strong Turkey. So even if I ignore all the usual European hypocrisy associated with Turkey's accession process, I cannot ignore the fact that it is quite difficult for Europe to digest a country like Turkey. So I need to be realistic in my hopes for attainable growth for Turkey, and it's not going to be because Europe will welcome the country with open arms, which it won't.

ALL of the countries in the Gulf and hence ALL investments in that region benefit from a spectacular performance of oil. It's a spillover effect from the good performance of a key component of their markets. But fundamentally speaking, the incredible amounts of cash that piled up as a result of selling oil to the rest of the world HAS been put into excellent use in other ways - We know the success stories of various financial and economic centers in that region but they depended on the successful oil exports to get started. Of course I'm not trying to belittle some of the great performance in the region, but it's always good to know why something has been successful so it can be repeated in the future. Turkey CAN benefit from the successful economies in the Gulf and offer goods and services to the region, but that's still called being export-oriented as far as I'm concerned.

Sure Turkey can attract investment from those Gulf countries and elsewhere. There is an argument to be made that when Turkey attracts foreign investment, growth can be achieved. But Turkey has had difficulty in attracting direct foreign investments and most of the money that has been attracted to the country came to buy "existing" firms and businesses as opposed to creating new businesses or new jobs. That's not growth, it's called saving the day by finding stuff in the attic to sell to finance a growing trade deficit.

Exports did register respectable growth if you completely disregard the incredible growth in the country's imports. It's the NET exports or the trade deficit that matters. Using selective data to publish some impressive growth in exports does not provide the whole picture and is not the right way to analyze any economy or investment. Seems like you've read too much AKP "talking points" and too much of the "bullet points" of those financial analysts who tout - and benefit from touting - the economic "successes" of the AKP government.

However, I don't disagree with the view that Turkey offers, or may offer, a very good growth potential. In fact, the manufacturers, exporters, i.e., all the guys who actually drive the engine of growth are doing a spectacular job given how truly hostile the environment is to new investments and entrepreneurial activities. Who in their right mind would continue operating a factory or run a business if they can receive an annual rate of risk-free 22%, or need to borrow at that rate? Of course what does happen is that they may borrow in currencies that are a lot cheaper to borrow, thus engaging in some sort of a "carry trade" to finance a business.

So one of the end results of this type of an economic "program" is that you create firms who are completely dependent on cheaply financed money in "cheap" foreign currency whose overall debt in other currencies has grown threefold since 2002. This is A growth model, I guess, but one that depends on the continuation of high interest rate policies along with an expensive Turkish Lira but carries risks when and if these policies are reversed or forced to reverse by market forces, or the way AKP likes to put it, by some "elitist" or "unashamed" Kemalists.

[Hadi]

At Last- a pundit in the international space that knows what they're talking about. Suna, your endeavors are greatly appreciated by all stakeholders who value Turkiye. CuriousInvestor, unfortunatley, it's what you don't know that can definitely be detrimental to your financial health. Regrettably, there are far too many shallow arguments foisted on the international community by the public relations apparatus of the AKP, that seek to make unwitting foreign investors, politicians, and diplomats, allies of their argumentative propoaganda in the name of mis-construed democratic rights, designed to place Turkey on the slippery slope policies towards state sponsored political Islam. If you have no more than a superficial understanding of Turkey, then you may find it difficult to discern such distinctions between carefefully manicured arguments for democracy, and pure populist polemic, so therefore avail yourself of a transalator, and listen to the spoken word off the hustings, and you will then share the state of fright of the vast majority of Turks.

[Hadi]

I would also tend to concur with much of Suna's economic analysis; applying western analytical paradigms containing macro-economic theoretical generalisations embodying Mercantilist, Keynsian, or Monetarist policies to the Turkish circumstance has only become even remotely rewarding in very recent times. Much that comes across the communiciations channels frequented by the external world simply provides a misleading perspective if not accompanied by well grounded data points at street level.

Turkiye is one of the few countries, seat of empires for the history of civilization, that has not suffered the yoke of western colonialism, and has there fore been late to assimilate much of the instituional cultural affinities normally associated with other countries of similiarly longstanding adaption of Breton Woods institutions.

Presuming what looks like candy, actually feels, tastes, and digests like candy, can be a mistake. The representatives of the IMF, for so long, seemingly so comfortably slumbering under the enchanting seduction of oriental charms, awoke to the realities by the early years of this millenium - a relatively late assessment by them, for a client country that was one of the first in recent times to default- in 1979.

Consider that financiers of Istanbul, host to relatively sophisticated investment operations involving stock exchanges and bond issues on international capital markets well over a hundred years ago, succeeded in doing so in a country without the fundamental cornerstone of a modern western financial system - a central bank...in point of fact the Ottomans had no banking system - it was effectively a foreign offshore sector existing under privilege in an onshore zone-Pera .

Modern Turkiye shares similiarites, in so far, as not all is as it may seem....you may speak the same language, and use the same words, but harbour different understandings- this cultural chasm represents the greatest risks facing unsuspecting foreign investors in bazaars around Taatikale, or the candy shop of the Istanbul Stock Exchange.

Ataturk adapted institutional frameworks and structures from other countries and grafted them onto a feudal Islamic landscape. However, it is taking considerably longer to ensure the cultural assimilation of underlying values, that ensures such graftings function efficiently as envisaged in the countries from whence they were adapted. Convergence towards the EU Acquis has reinforced the speed and benefits accruing to Turkey from New World Order instituions in this regard- but the AKP or any party needed only to have sat there for the ride.

An occaissional prod from a trusted guide and steward can be most helpful to avoid periodic entrapment in the everpresent oriental dance that mesmerises the inward flow of investment....irrespec... of the politics of dance.