Turkey turns to pension fund to boost stocks

The Turkish government has ordered private pension funds to increase their holdings of Turkish stocks in an attempt to bolster financial markets. This decision comes after the Bist 100 equity index tumbled 18% this year due to investor worries about a closely contested election scheduled for May. The Istanbul stock exchange was closed last week as traders sold equities in response to the earthquake on February 6. The exchange will reopen on Wednesday.

According to an announcement in the Official Gazette, private pension funds will now be required to allocate 30% of the funds the government contributes to match individual pension contributions to Turkish stocks, a significant increase from the previous requirement of 10%. The measure is aimed at strengthening the country’s financial markets and aiding earthquake relief efforts, which have killed over 31,000 people in Turkey and thousands more in Syria.

While the move is expected to be received positively by investors, Murat Gülkan, the chief executive of OMG Capital Advisors in Istanbul, warns that changes aimed at propping up the Bist 100 may lead to greater problems down the line. Gülkan believes that forcing pension funds to increase their stakes in local stocks could be politically expedient ahead of the election but is unlikely to benefit pension fund investors.

The Turkish government has already promised to provide TL10,000 ($530) in aid to families affected by the earthquake. Economists expect additional measures in the coming weeks to help mitigate the financial impact of the disaster. Clemens Grafe, an economist at Goldman Sachs, expects much of the response to come from government spending. The central bank may also look to provide a boost by cutting borrowing costs, although analysts worry that easing monetary policy could again send price growth rising after it began cooling in recent months.

While Turkey’s debt load is considered manageable, the country remains financially vulnerable due to a yawning current account deficit and high inflation. The debt-to-gross domestic product ratio is expected to end 2022 at about 37%, according to a FactSet poll of economists, providing some headroom to borrow for the earthquake response and relief efforts. Bilateral funding will also be important to pay for the relief and rebuilding efforts, with the World Bank announcing $1.8bn in aid last week. Funding from the Middle East and Russia was becoming increasingly important to Turkey’s economy even before the earthquake, and Turks living abroad, many of whom are from the affected southern part of the country, may also contribute.