On Sep 13, the Central Bank of Turkey hiked its main interest rate to 24%, a hike of 6.25% from the previous 17.75%. This resulted in lira appreciating by 4.3% against the U.S. dollar and iShares MSCI Turkey ETF (TUR - Free Report) gaining 5.9% on the same day. This is the biggest rate hike in President Erdogan’s 15-year rule. The rates have been hiked by 11.25% since late April (see: all European Equity ETFs).
Investors should note that the Turkish lira has plunged more than 40% this year. This fall is considered to be a result of Erdogan’s influence on monetary policy and dispute with Trump administration that has caused a series of tit-for-tat sanctions and trade restrictions.
The row started in March when President Trump wanted to impose tariffs on import of steel and aluminum of 25% and 10%, respectively, which were subsequently implemented. In July, President Trump demanded the release American Pastor Andrew Brunson, arrested on terror-related charges by Turkey. However, this demand went unfulfilled, which was followed by Trump imposing sanctions on two Turkish ministers and doubling of tariffs imposed in March. Turkey has imposed tariffs on several U.S. products like rice, hard alcohol, leaf tobacco, cosmetics and cars.
President Erdogan has been against the rate hikes as he sees the same as an obstacle to the country’s growth. Inflation is at a 15-year high level of 18% and cost of imports have spiked for the business houses in Turkey.
Finance Minister Berat Albayrak said on Sep 13 that this rate hike was an indication of the independent functioning of the apex bank and announced that the medium-term economic program would be announced on Sep 20 (read: Has EM Selloff Bottomed Out? ETFs to Tap).
“If needed, further monetary tightening will be delivered,” the bank said in a statement.
President Erdogan and his government have been urging their fellow citizens to sell their foreign currency savings and do property and sales agreements in the domestic currency. He is seeing this crisis as illusory and could be overcome with unity among the Turks.
The decision of rate hike was welcomed by many market experts who saw this move as an indication that Turkey could come out of its crisis without the help of IMF unlike Argentina, which has asked for the early disbursement of $50 billion from IMF to bail it out of its crisis (read: Are All of 'Fragile Five' EM ETFs Equally Frail?).
From now on, Turkish lira needs to be used for all the sale and lease of real estate property and cars as per a decree signed by the Turkish president on Sep 13. A month’s time has been given to companies for renegotiating their existing contracts and convert them into lira from other currencies. This directive was an amendment made to a regulation called Act 32. However, the exchange rate for conversion in the existing deals has not been specified.
The surge in TUR got triggered by rate hike, but has mellowed since then in anticipation of a new medium-term program set to unveil on Sep 20. Let’s focus on this ETF:
It tracks the MSCI Turkey Investable Market Index. There are 62 holdings in the fund pool. AUM is $417.1 million and the expense ratio is 0.62%. The fund is highly liquid having a daily average traded volume of 983,000 shares. The fund has gained 5.5% over the past week.
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