1/4
Words are not enough to express feelings. All my thoughts and prayers are with the affected people.

🙏🇹🇷

Not easy to work with numbers especially when they stand for lives but just wanted to check a few quick points so the impact is better understood. 2/4
Affected 10 cities have a total population of 13.5mn (2022), ie. 16% of Turkey's total.

Making use of official stats as of 2021, there should be ~2mn residential buildings (estimated) in the region; on average with 4.3 floors and 3.9 people per household.

Turkish banks RoE was 49.9% in 2022

- below avg annual CPI of 72%
- well above avg short term local bond yield of 20%
- well above avg short term deposit rate of 19%

Conventional anchor wud be CPI, but good to consider bond/deposit rates as CPI was not relevant to market rates As CPI goes up, interest rates and banking RoEs typically go up (though, mind the ST impact of maturity mismatch and changes in cost of risk).

However, 2022 was an exception to all exceptions as banks had a huge RoE relative to interest rate environment given monetary policy.

A few lessons/reminders for fragile emerging markets from Sri Lanka.

1) Had it coming for many years with consistently large current account deficits (despite positive tourism and remittances) which led to.... ....a buildup of external debt.

1/X

#Turkey's new economic plan feels rather random and unstructured, and is vastly overinterpreted. In fact, there may not be even one.

Nevertheless, let's take things as they are and have a look at the EM currency shocks in the 90s to find clues about what might happen next. 2/X

First, a disclaimer: History doesn't repeat itself, but it often rhymes.

These shocks took place for different reasons in different markets, developed differently & resolved in a different way.

-1Y and 0Y are years of maximum pressure and econ rebalancing.

So here we go:

🇹🇷 Turkey's weight in MSCI Emerging Markets Index hits a fresh all-time low at 0.28% - right below Kuwait, Chile and UAE, and less than half of Philippines and Poland.

This makes #Turkey a rounding error for EM investors, leading to a vicious cycle of no performance <> no flows. Just to put things into perspective,

👉Reason 1: Turkey's significant underperformance for various reasons
👉Reason 2: Lack of major offerings (Mcap/GDP only 25%)

👉Every 1% percent weight implies approximately USD 3bn passive and significantly (2-3x) more active in/outflows

1/x

🇹🇷 Turkey is having a tough year with Covid-19 leaving less room for policy mistakes.

Here's a quick X-ray in context.

1) Growth: Less hit on the economy; 2Q20 was better than major emerging & developed peers.

But % growth is usually not a problem for Turkey. 2/x

Problem is usually how Turkey grows. Is it productivity gains, value added, capital investments; fat or muscle?

Well, a long discussion. But the big push for credit (ie. sugar rush) that accelerated credit growth momentum up to 50-80% levels definitely helped.

1/x MSCI Emerging Markets Index was created in Dec 1987.

At inception, there were 10 markets with 2 of them accounting for >50% of the index: Malaysia and Brazil. It was an Asia + LatAm index but no China at the time.

Today's developed market, Portugal, had 8.5% weight. 2/x Fascinating changes took place since then. Imagine, we had East and West Germany until 1990!

Indonesia and Turkey were added in 1989 with a small weight.

S. Korea, Colombia, India, Pakistan, Peru, Sri Lanka, Venezuela, Israel, Poland and South Africa followed until 1995.