Turkey leans on pension funds to prop up stock market

The government of President Recep Tayyip Erdoğan has ordered private pension funds to boost their holdings of Turkish stocks after a sell-off in the wake of last week’s earthquake prompted authorities to halt trading on Istanbul’s equities bourse.

The decision, announced on Tuesday, comes a day before Istanbul’s stock exchange reopens. It was closed six days ago as traders rushed to sell equities following the devastating earthquake on February 6.

The measure, aimed at bolstering financial markets, comes as Erdoğan battles criticism over his handling of the response to the earthquake, which has killed more than 31,000 people in Turkey and thousands more in Syria, as well as the building standards put in place in the lead-up to the disaster.

Turkey’s Bist 100 equity index has tumbled 18 per cent this year, in a slide that had started even before last Monday’s earthquake as investors fretted about a tightly contested election scheduled for May.

Turkey’s stock market was suspended on February 8 after two days of tumultuous trading, with authorities also cancelling all of Wednesday’s deals. The Turkish lira has also remained under pressure, trading on Tuesday near an all-time low of 18.85 to the US dollar.

Borsa Istanbul, the exchanges operator, did not respond to a request for comment on Tuesday on whether it would proceed with this week’s reopening.

Private pension funds will be required to allocate 30 per cent of the funds the government contributes to match individual pension contributions to Turkish stocks, said an announcement in the Official Gazette on Tuesday. The previous requirement was 10 per cent.

The government matches 30 per cent of pension contributions up to a yearly minimum wage, according to HSBC.

Funds will also be allowed to increase the weighting of a single stock in their portfolio to 5 per cent, from 1 per cent previously.

Murat Gülkan, chief executive of OMG Capital Advisors in Istanbul, said investors were likely to react positively to the announcement but warned that regulatory changes designed to keep the Bist 100 buoyant could “impede healthy price discovery and will lead to greater problems down the line”.

Forcing pension funds to up their stakes in local stocks after a big rally since 2019, which has only recently reversed, “may be politically expedient ahead of elections, but it is hard to see how it benefits pension fund investors”, Gülkan added.

Erdoğan has already promised to provide families affected by the earthquake TL10,000 ($530) in aid, but economists expect more measures in the coming weeks to dull the financial blow from the disaster.

Clemens Grafe, economist at Goldman Sachs, said much of the response would come from government spending, but that the central bank might also look to provide a boost by cutting borrowing costs. Turkey’s central bank already slashed interest rates last year despite inflation that climbed above 85 per cent in October, and analysts worry that further moves to ease monetary policy could again send price growth rising after it began cooling in recent months.

“There is high risk that rates will be cut and following the introduction of various support measures by the banking watchdog . . . for those affected by the disaster,” Grafe said, referring to widened grace periods for loans and higher credit card spending and the loosening of other consumer banking rules.

Turkey’s debt load is considered to be manageable for an emerging market economy with a speculative credit rating, according to economists and analysts. The country’s debt-to-gross domestic product ratio was expected to end 2022 at about 37 per cent, according to a FactSet poll of economists — giving the country some headroom to borrow for the earthquake response and relief efforts.

Still, a yawning current account deficit and high inflation leave the country financially vulnerable, meaning “it will not be easy to find market funding at reasonable yields in the size potentially required”, Grafe said.

He added that bilateral funding would be important to pay for the relief and rebuilding efforts. The World Bank announced $1.8bn in aid last week, while, even before the earthquake, funding from the Middle East and Russia was becoming more important to Turkey’s economy. Turks living abroad, many of whom are from the affected southern part of the country, may also contribute, Grafe said.