Tax Evaders Hiding $130 Billion Courted by Yields: Turkey Credit

Turkey is betting a no-questions-asked policy and some of the highest yields in emerging markets will help persuade tax evaders to repatriate an estimated $130 billion hidden abroad.

Turkey’s government is asking lawmakers to approve a plan giving amnesty to individuals and companies for repatriating assets, according to a bill sent to parliament on April 24. Funds brought into the country will be taxed at a rate of 2 percent, with no questions asked about how the money was earned, the draft says.

The proposal comes as lira volatility is the lowest among 10 emerging markets in Europe, the Middle East and Africa and as banks offer more than 20 times the return for lira deposits than for dollar deposits, data compiled by Bloomberg show. Turkey has more chance of success than earlier because the economy is in better shape, Deputy Prime Minister Ali Babacan said, the Anatolia news agency reported April 21. Bringing capital back into the country would improve financial stability, according to Naz Masraff at Eurasia Group.

“The success of the project depends on details of the legislation such as whether there will be an investigation against money laundering, as required by international procedures,” Osman Arioglu, former head of the tax authority, said by telephone yesterday from Istanbul. “Those declaring their assets must be absolutely sure that there will be no money laundering probe or retroactive tax.”

‘No Chase’

Finance Minister Mehmet Simsek said during a televised news conference in Istanbul yesterday that the government “will not chase the money that will be repatriated.”

Turkish citizens and companies have $130 billion of portfolio investments abroad, including more than $50 billion in U.S. Treasuries, Milliyet newspaper quoted Babacan as saying on April 17. Turkey’s private sector invested a record $4.5 billion abroad in 2012, he said.

“Money held in Europe or tax havens is no longer safe,” state-run Anatolia quoted Babacan as saying in Washington. “Turkey stands in a very, very different position in 2013 with its reputation, the strength of the Turkish banking sector and interest from money that will be brought to Turkey.”

A three-month deposit in dollars provides an annualized return of 0.28 percent a year and 0.11 percent in euros, according to data compiled by Bloomberg. That compares with 5.88 percent for Turkish liras, the fourth-highest among 29 major currencies worldwide, the data show.

Capital Inflows

“The government hopes to reduce Turkey’s over-reliance on short-term inflows, which leave the country susceptible to external shocks,” Masraff, a London-based analyst at Eurasia Group, said in an e-mail yesterday. “Repatriation law is a way to bring back capital into the country” and improve the way in which the current-account deficit is financed, she said.

The extra yield investors demand to hold Turkey’s dollar bonds rather than U.S. Treasuries rose four basis points to 202 at 2:30 p.m. in Istanbul today, JPMorgan Chase & Co.’s EMBI Global Diversified index showed. That compares with an average of 285 basis points for emerging markets.

Yields on two-year notes dropped one basis points, or 0.01 percentage point, to 5.45 percent. While that’s the lowest since Bloomberg records began in 2005, it’s the fourth-highest rate among 19 emerging market and compares with 0.23 percent on U.S. Treasuries and 0.012 percent on German notes.

Biggest Drop

Turkish yields have declined the most among 20 major emerging markets tracked by Bloomberg over the past year, from 9.45 percent on April 26, 2012. They’re down from an average of 11.7 percent in 2009 when Turkey last offered an amnesty. The decline may make repatriation less appealing, according to Sertan Kargin, chief economist at Eczacibasi Securities in Istanbul.

“This may prove a setback as the holders of savings abroad may be less enthusiastic to return to Turkey given the more limited yield opportunities than four years ago,” Kargin said in an e-mailed report today. Lower tax rates “may not be sufficient to encourage them at this juncture.”

Five-year credit-default swaps on Turkey rose one basis points to 124, compared with 140 for Russia, rated one step higher than Turkey at Fitch Ratings. The contracts, which increase as perceptions of creditworthiness deteriorate, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Investment Grade

Fitch gave Turkey its first investment-grade rating in 18 years in November, citing easing near-term financial risks, a moderate and declining government debt burden, a sound banking system and favorable growth prospects.

Turkey’s current-account shortfall narrowed to $47.5 billion in 2012 from a record $77 billion the previous year, the biggest worldwide after the U.S., as the central bank tightened monetary policy to curb lending.

The currency rebounded 6 percent last year after tumbling 18 percent in 2011, the biggest depreciation worldwide. It declined 0.1 percent to 1.8008 today, leaving the lira 1 percent weaker this year.

Amnesty Program

Under an amnesty program that began in November 2008 and ended at the close of 2009, Turkish citizens and companies repatriated 27 billion liras, equivalent to about $17 billion at that time, former tax chief Arioglu said yesterday. Arioglu is now chairman of consultancy firm, AKT Bagimsiz Denetim AS.

“The government tried this sort of scheme back in 2008 as well, but due to the onset of the financial crisis, it wasn’t a huge success,” Mariya Gancheva, a London-based credit analyst at Mitsubishi UFJ, said in an e-mail yesterday. “With the economy doing well, and an investment grade in hand, this time the scheme has a much better chance of succeeding.”

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