Turkish Bonds, Stocks Tumble on Foreign Tax Ruling

Turkish bonds plunged, lifting yields by the most in three years, as the Turkish Lira and the benchmark IMKB-100 index of the Istanbul Stock Exchange slumped after the Constitutional Court ruled that foreign investors should pay tax on profits from bonds and currency futures contracts. The slide in lira-denominated securities raised yields as much as 63 basis points to 8.61 percent, the steepest climb since July 2006. The bonds traded at 8.19 percent at 3:40 p.m. in Istanbul, according to an ABN Amro index. The U.S. dollar gained 1.3 percent against the lira and was trading at 1.4632 liras at 3:40 p.m. While domestic investors are subject to a 10 percent tax on profits from government securities and currency futures contracts, foreigners are currently exempt along with local and international shareholders. The ruling may add to investor concerns after the Doğan Media Group, or DMG, Turkey’s biggest media company, received record tax levies of 5.7 billion liras ($3.9 billion). “Obviously these sort of surprises hit confidence of those that are on the brink of investing, especially while the whole issue surrounding the DMG case continues,” Simon Quijano-Evans, head of emerging-markets strategy at Credit Agricole Cheuvreux in Vienna, wrote in a note Friday. The court’s decision will not take effect for nine months and the government will take steps to address investors’ concerns before then, Finance Ministry spokesman Abdülhamit Yıldız told Bloomberg in a telephone interview Friday. The IMKB-100 index declined 1.7 percent to 50,145 points. The lira dropped the most among emerging-market currencies tracked by Bloomberg. South Africa’s rand was the second worst performer, losing 1.5 percent against the dollar. “This Turkey ruling is causing a lot of guys to lighten their exposure to emerging-market risk,” Bloomberg quoted Ian Scott, a bond and currency trader at Stanlib Asset Management in Johannesburg, as saying. “All the emerging market currencies in the EMEA zone tend to live and breathe on risk sentiment so they’re selling off a bit now.” Poland’s zloty snapped a four-day advance against the euro, losing 0.5 percent. Hungary’s forint declined 0.3 percent. “The Turkey story has amplified the sell-off in emerging-market currencies,” said Gaelle Blanchard, emerging-market strategist at Societe Generale in London. “There’s also a general bout of profit taking after the strong rally we’ve seen recently.” While foreign holdings of shares in Turkey increased $1.84 billion between January and August, international holdings of government debt fell $1.21 billion in the same period, according to a central bank statement on Oct. 12. “The relative lack of foreign inflows into Turkey reflects the increasingly low carry on bonds, plus the still weak growth outlook,” said Timothy Ash, an emerging markets economist at Royal Bank of Scotland Group in London. “Investors might remember that the plan to introduce withholding tax was one of the factors that provoked the sharp market correction in the spring of 2006, amongst other things. This affair thus needs to be watched.” “Investors probably don’t need another excuse not to put money to work in Turkey,” Ash said. “So this just underscores the importance for the government to act quickly to resolve the uncertainty over the application of withholding tax.” Çetin Ali Dönmez, managing director of TurkDex, the Turkish Derivatives Exchange, said the Finance Ministry could turn this ruling into an opportunity by providing exemption of withholding tax for domestic investors, too. Speaking to Anatolia news agency, Dönmez said such a decision would help investors and Turkey.

Turkish Bonds, Stocks Tumble on Foreign Tax Ruling hurriyetdailynews.com Fri, Oct 16, 2009