The European Bank for Reconstruction and Development (EBRD) has invested TRY40mn in a TRY200mn bond issued by Turkish supermarket chain operatör Migros, the development bank said on February 26.

The 728-day floating-rate bonds were sold to qualified investors at an annual compound interest rate of 30.39% within the scope of Migros’ TRY1bn domestic bond issuance limit, the company said on February 26 in a stock market filing.

The cost of the bonds issued by a substantial retailer backed by a prominent majority shareholder, Anadolu Endustri Holding, illustrates the tight financing conditions in Turkey that prevail despite the government’s efforts to push down loan rates and ‘encourage’ local lenders to boost lending.

The EBRD is a leading institutional investor in Turkey. It has invested over €11bn in 283 projects in the country since 2009. The development bank invested a total of €1bn in 34 projects in Turkey in 2018 and it plans to invest another €1bn there in 2019.

Third time
It is the third time Migros has tapped the domestic capital markets for debt since July last year.

In October 2018, the EBRD invested TRY9mn in a TRY46mn local currency-denominated bond issued by Migros. In July 2018, it invested TRY30mn in a TRY150mn Turkish-lira-denominated bond issued by the retailer.

In December 2018, the EBRD provided a 5-year TRY-loan to Migros, worth the equivalent of €60mn, for capital expenditure requirements, Migros said on December 25 in a bourse filing.

In November 2017, the EBRD provided a five-year senior local currency loan in Kazakh tenge, equivalent to $11mn, to Migros’ 100%-subsidiary Kazakh food retailer Ramstore Kazakhstan.

In March 2017, Migros, one of the largest retailers in Turkey, completed the acquisition of UK-based Tesco’s 95.5% controlling stake in Turkish retailer Tesco Kipa for TRY199mn.

“Migros has continued to experience rapid revenue growth with a 38.7 percent year-on-year increase. This growth was a result of opening 193 stores in 2017 and acquiring a 96.25 percent stake in Kipa,” a report by consulting firm Deloitte said last month. Migros ranks 225th on Deloitte’s 2019 Global Powers of Retailing Top 250 companies list. However, the rankings are based on revenues in 2017, the year before Turkey’s economic turmoil began with a currency crisis that has gone on to create corporate debt troubles and has badly hit consumer demand and sentiment and put the country on the path to a probable recession.
Migros generated $4.2bn in revenues while its net income was $140mn in the 2017 fiscal year.

Migros is also active in Macedonia and Bulgaria with its Ramstore chains, according to the public disclosure platform (KAP).

Migros operated in 81 Turkish provinces, via a network of 2,040 food retail stores (2,059 at end-2018) under the Migros, M-Jet, 5M and Macrocenter brand banners as of January 31, the company said on February 5 in a bourse filing. Migros was also operating a total of 44 stores abroad as of end-January and the total number of its stores stood at 2,084, down from 2,103 at end-2018.

Hit by currency crisis
In Q3 2018, Migros posted a net loss of TRY667mn due to its TRY5.2bn (as of end-September) worth of EUR-denominated debts, hit by the currency crisis which reached its nadir in August, the company said on November 7 in a bourse filing. In Q3 2017, the company posted a TRY70.5mn net loss.

Following the release of its Q3 financials, Migros revised up its sales growth target for 2018 to 22% from a previous 20%, the company said in a press release on November 7.

Taciler Invest expects Migros to post a TRY538mn profit in Q4, Ece Mandaci of the Istanbul-based brokerage house said on January 18 in a research note.

Since last month, Migros has been among the Turkish retailers targeted by Turkey’s populist president Recep Tayyip Erdogan for “unreasonably high prices”. He has demanded price cuts to help the government’s fight against double-digit inflation. Erdogan is on the campaign trail ahead of local polls to be held on March 31.

Painting election outcome scenarios
Foreign investors’ main election outcome scenario sees the governing coalition exposed amid the economic turmoil to losing some municipalities, but not to the extent that the results could bring about a snap general election, an unnamed foreign investor who held confidential talks in Turkey, told Reuters on February 27.

Meanwhile, unnamed AKP ruling party officials were keeping to their usual pre-election habit in painting a picture with foreign media that the elections in Turkey are being held in a conventional environment and that the AKP is afraid of losing ground.

Some of those officials told Reuters on February 27 that the party’s internal polls showed support for the AKP at 36.8%-38%, while backing for ultra-nationalist coalition partner MHP stood at 10.5%-11% “due to harsh economic conditions”. A simple calculation would show that the unnamed officials are saying that the AKP-led coalition’s total vote is at just below the 50% threshold—an intensified election campaign across the final 30 days prior to election day would justify a result in which the coalition surpasses the 50% threshold at the elections.

Last month, Reuters reported two unnamed AKP sources as saying that the party’s internal polls showed support for Erdogan’s party had fallen to 32-35%. A source close to the AKP told Reuters on February 27 that Erdogan’s election campaign was slowly beginning to bear fruit. That can be seen as serving up a justification for the 36.8%-38% band that was referred to subsequently.

Reuters’ sources and some pro-Erdogan pollster company owners have also directed reporters to examine how the main opposition social-democratic Republican People’s Party’s (CHP’s) Istanbul candidate has managed to close the gap with his AKP opponent to just a few percentage points, while the AKP’s Ankara candidate has been closing the gap with his CHP rival. More unnamed AKP sources and pollster companies followed this direction up by indicating that it should not come as a surprise if the AKP coalition holds on to its lead to triumph in Istanbul while securing a win in Ankara.

Why government won’t fall
Ulas Basar Gezgin explained on February 27 in an analysis for bianet why Turkey’s economic crisis will not cause the Turkish government to fall. He cited Erdogan’s present-day big media dominance, something that did not at all exist in the 2002 elections when Erdogan took on the government following the 2001 economic crisis.

Moreover, back in 2002, Turkish society was not as polarised as it is now, a change brought about by Erdogan’s 17-year-long effort to keep his voter base consolidated. The most important difference from 2002, however, can be found in digesting how Erdogan’s presidential republic of Turkey ranks at 110th out of 167 countries surveyed for the Democracy Index 2018 published by the Economist Intelligence Unit (EIU). Iraq, Ivory Coast and Uganda each have higher scores for their electoral process and pluralism compared to Erdogan’s Turkey. 

All-in-all, Erdogan’s government is right now staying in harmony with global finance. However, it should be noted that the executive president and the international financiers he has long relied upon could soon be at odds again—as they were last August over the US Pastor Brunson crisis—if Erdogan really goes through with the purchase of the S-400 advanced missile defence system from Russia and, to fellow Nato members’ fury, installs it in Turkey.

Quarter-owned by private equity
Listed on Borsa Istanbul, Migros is 50%-owned by Anadolu Group, a diversified fast-moving consumer goods (FMCG) group and a longstanding partner of the EBRD. A total of 23.2% of its shares belong to private equity group BC Partners and the remaining 26.8% are held by free-float investors. 

In May 2017, BC Partners’ Moonlight Capital informed Turkish conglomerate Anadolu Endustri Holding (AEH) that it was to exercise a put option to sell its 19.5% stake in Migros to AEH for TRY509mn.

Migros’ share price was up 0.81% d/d to TRY16.09 as of 14:00 local time on February 27 while the benchmark BIST-100 on the Istanbul stock exchange was down 0.67% to 104,375. The annual loss on Migros shares stood at 35% versus the 14% y/y gain on the BIST-100.

The BIST-100 was in the 87,000s back on January 3 when the Migros share price was in the TRY13s.

Tacirler Invest’s 12-month target price for Migros stood at TRY27, Mandaci said on February 5 in a research note.

Seker Invest’s target price for Migros was TRY28.58, the Istanbul-based brokerage house said on February 27 in its list of recommendations.

“Good reflection of belief in FED’s U-turn”
“A striking feature of Q1 has been the decline in cross-asset volatility—a good reflection of belief in the FED’s U-turn.  As this belief has been a primary driver of recent risk-on sentiment —along with hopes for a U.S.-China trade deal—this week’s more nuanced FED messaging (still debating tightening this year) could take more steam out of the rally. The steady drumbeat of concerns about the growth outlook also threatens risk appetite (consensus probability of recession for both U.S. and Euro Area over the next year now 25%, up from 15% in December). For EM assets in particular, further gains will require more validation from Fundamentals,” the Institute of International Finance (IIF) said on February 21 in a research note entitled “Steamless Rally”.

Capital Economics has forecast that the Turkish lira will lose ground against USD to stand at 7.00 at end-2019 from the current 5.30s, while the Borsa Istanbul’s benchmark BIST-100 will fall to 80,100 by the end of this year.

“At the [beginning of 2018], large and rising current account deficits in Argentina and Turkey mapped into substantial overvaluations – around 15 percent – and both currencies fell sharply during 2018… Argentina’s Peso and the Turkish Lira are only mildly expensive [now],” the IIF said on February 21 in a research note.

“Further signs recession deepened in Q4”
Capital Economics said on February 27 in its Emerging Europe chart book report entitled “Fiscal stimulus on its way”: “The past month has brought further signs that Turkey’s recession deepened in Q4. Industrial production declined for a fifth consecutive month in December, and contracted by 9.8% in year-on-year terms. In the same month, retail sales fell by 9.2% y/y… While net trade has helped to offset some of the weakness of domestic demand, our Tracker points to GDP contracting by around 3.0-3.5% y/y in the final quarter of 2018.

“Some of the more timely data suggest that, while the worst of the economic downturn may now have passed, any recovery is likely to be bumpy. For example, the services and retail confidence indices dropped back in January. Headline inflation edged up from 20.3% y/y in December to 20.4% y/y in January on the back of a jump in food inflation. The central bank struck a fairly hawkish tone in its latest Inflation Report suggesting that, for now at least, it is hesitant to push ahead with an outright interest rate cut. But policymakers did offer some tentative support by lowering banks’ reserve requirement ratios by 50-100bp.” 

On February 27, Turkish statistical institute TUIK said that Turkey’s economic confidence index rose by 1.2% m/m to 79.4 in February but was down against the 81.9 recorded in December. The index fell as low as 75.2 in October.

The seasonally-adjusted consumer confidence index fell 0.7% m/m to 57.8 in February while the seasonally-adjusted retail confidence index rose by 1.6% m/m to 96.9 in the month.

Data “consistent” with 5% y/y fall in Q1 consumer spending
Liam Carson of Capital Economics said on February 22 in a research note Emerging Europe entitled “Weaker growth, central banks’ dovish turn”: “In Turkey, consumer confidence slipped back again this month, leaving it consistent with a 5% y/y fall in consumer spending in Q1. That would be the worst performance since 2009… while the slump in Turkey’s economy may now be about to reach a trough, GDP is still likely to contract [by 2.5% y/y] over this year as a whole… [The central bank’s reserve requirement ratios] move… appears to be an effort to support the struggling economy without immediately resorting to outright interest rate cuts, which could spook the markets and cause the lira to weaken.

“While we do expect rate cuts this year [from the current 24% to 20% at end-2019], these are probably still another couple of months away and we doubt that interest rates will be lowered as far as markets are pricing in.” 

James Swantson of Capital Economics said on February 26 in a separate research note on the emerging markets growth outlook: “In Emerging Europe, economic activity weakened due to the deepening recession in Turkey… More timely activity data suggest that growth weakened at the start of 2019. Aggregate EM auto sales fell by 11.2% y/y last month, worse than the 9.3% y/y drop in December. Sales contracted sharply in Turkey and Argentina where consumers are still reeling from the effect of last year’s currency crises.” 

On February 21, in a research note entitled “Are EMs prepared for another downturn?”, Capital Economics concluded: “Slower global growth is also likely to be accompanied by a rise in risk aversion. From a macro-economic perspective, one key point is that EMs’ susceptibility to the kind of crises seen last year in Turkey and Argentina has diminished. No major EM runs a current account deficit on the scale that those two did last year.

“In so far as there are risks of economic crises, these tend to be concentrated in smaller frontier markets… Turkey and Argentina ran deficits of 6-7% of GDP last year, indicating that they were highly dependent on foreign funding. But after their currency crises, their deficits are now narrowing – in fact, Turkey is actually running a small surplus.”