Lira Plunge Scuppers Asset Sales in Threat to Turkey Financing

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Turkish Lira vs Borrowing Costs

Finance Minister Mehmet Simsek boasted in October that Turkey’s privatization agency was so effective it was working itself out of a job. Six months on, its position looks safe: sales of state assets are collapsing.

Turkey extended its bidding deadline for state-owned insurance units of Turkiye Halk Bankasi AS in March. This month its $2.76 billion sale of the national lottery fell through and it postponed offering a stake in the stock exchange and an auction for highways linking to a Bosporus bridge. President Recep Tayyip Erdogan said last week that Turkey should wait for 5G mobile technology, which doesn’t yet exist, calling into question an auction for a 4G network planned next month.

Investors are wary of buying companies reliant on revenue in liras amid the biggest depreciation of any major currency this year, while the June 7 parliamentary election is raising concern that any sales will prove politically contentious. The aborted offerings weigh against an improvement in the current-account deficit since 2013, one of the few positive points in an economy challenged by slowing growth, accelerating inflation and the biggest jump in bond yields in emerging markets.

Borrowing Needs

“A fall in financing from privatizations would mean a higher borrowing need for the Treasury, at a time when borrowing conditions are deteriorating,” said Erkin Isik, a strategist in Istanbul at Turk Ekonomi Bankasi AS, the local unit of BNP Paribas SA.

Simsek said on Twitter on Tuesday that Turkey has “zero” funding gap and has already secured its 2015 privatization target of 8.7 billion liras ($3.3 billion).

Borrowing costs have soared, with the yield on Turkey’s benchmark two-year note touching a one-year high of 10.40 percent on Tuesday, before dropping to 9.91 percent at the close.

Record Lows

The lira also pared losses, falling 0.7 percent to 2.6566 per dollar at 10 p.m. in Istanbul. It has dropped 12 percent against the U.S. currency this year.

The lira fell to all-time lows last week as the central bank kept its three benchmarks unchanged, with Governor Erdem Basci instead adjusting rates on foreign-exchange loans and bank reserves. Policy makers have faced government pressure to keep rates low to support the economy before elections.

That pressure has eroded investor confidence at a time when the outlook for the Federal Reserve to raise rates for the first time since 2006 damps investor demand for riskier assets.

“A lot of investors are holding fire until after the elections,” Jonathan Friedman, a risk analyst at Stroz Friedberg in London, said by phone on Monday. “Aside from a few state-backed investors, interest from the international investment community has been limited.”

‘Fragile Five’

Morgan Stanley, which in 2013 labeled Turkey one of the so-called “Fragile Five” nations most vulnerable to tightening in the U.S., said last month that while some of the countries at risk have adjusted, Turkey was among those that hadn’t. Turkey’s balance of payments has been aided by a narrowing in the current-account deficit, which fell to the lowest in more two years at $2 billion in January before widening to $3.2 billion the following month.

“The destination of long-term investors doesn’t include Turkey anymore as the Fed tightening cycle looms,” Isik Okte, a strategist at TEB Invest in Istanbul, said by e-mail on Monday. “Investors aren’t putting money to work in countries that have liquidity concerns as the Fed moves toward tightening, and Turkey’s at the top of that list.”

FDI Plunges

Foreign-direct investment dropped to $8.7 billion last year, down from $19.1 billion in 2007, according to central bank data.

Turkey postponed tenders for construction of two highways that were part of larger project to build a third Bosporus bridge, according to an article published by the Official Gazette. Tenders for construction of Kinali-Odayeri and Kurtkoy-Akyazi sections of highway will be held July 7 and June 30, respectively, it said on Monday. Both offerings were initially scheduled for May 6.

That follows the cancellation of operational rights for bridges and highways in 2012, after Erdogan said the winning bid of $5.7 billion from a consortium led by Koc Holding AS, Turkey’s biggest group of companies, was too low.

The sale of the national lottery fell through after Net Holding AS and Hitay Investment Holding couldn’t get financing by the deadline. A group of companies that had the second-best bid said it would consider an offer but that the lira’s decline was a potential stumbling block.

Turkey’s zeal to attract foreign investment appears to have waned over the last few years, according to Tim Ash, an economist at Standard Bank Plc in London. There also “seems to be a desire to have locals win these deals at the moment, but they’re constrained by financing,” he said by e-mail yesterday.

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