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Turkey: Valuations, Istanbul elections re-run and sanctions

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    21 June 2019
    Published by

    As residents of Turkey’s biggest city, Istanbul, go to the polls again this Sunday, with risks associated with whether President Erdogan’s AKP wins or loses, investors should be wary of other near-term events that could be negative for markets.

    For one, US authorities have stated that sanctions will be imposed on Turkey if the NATO country takes delivery of the S-400 air and missile defence equipment from Russia, possibly in July. It is not clear yet how far-reaching such sanctions might be. However, even if these sanctions are limited, the market reaction may not be, as we saw in the case of Andrew Brunson.

    In addition, concerns about reserves, corporate indebtedness and banks’ asset quality have also not gone away. This may continue to weigh on bank bond valuations.

    Still, we note here that Turkish bank bondholders are no strangers to volatility – we have been here before. Since Akbank issued a US$1bn 5-year bond in July 2010, marking a resurgence in eurobond market activity, we have had several rounds of elections, concerns about Greece exiting the Eurozone, a US taper tantrum, an attempted coup, withdrawal of an issuer’s banking licence, sanctions fears, arrest and imprisonment of a major bank’s deputy general manager and much more impacting the valuations of Turkish bank bonds. Hence, the decision to re-run elections in Istanbul and to proceed with taking delivery of military equipment from Russia should be seen in this context.

    We will be closely watching the much-anticipated meeting between President Trump and President Erdogan at the G20 summit on June 28 and 29, which may well address sanctions-related risks.