Turkey relies on pension funds to prop up the stock market

President Recep Tayyip Erdoğan’s government has ordered private pension funds to increase their holdings in Turkish stocks after a sell-off following last week’s earthquake prompted authorities to suspend trading on the Istanbul Stock Exchange.

The decision, announced on Tuesday, comes a day before the Istanbul Stock Exchange reopens. It was shut down six days ago as traders sold shares following the devastating February 6 earthquake.

The move, aimed at bolstering financial markets, comes as Erdoğan battles criticism of his handling of the response to the earthquake that killed more than 31,000 people in Turkey and thousands more in Syria building standards introduced at the top – to the point of catastrophe.

Turkey’s Bist 100 stock index has fallen 18 percent this year, in a slide that began before last Monday’s earthquake, as investors worried about a hard-fought election scheduled for May.

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

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

According to an announcement in Tuesday’s Official Gazette, private pension funds must allocate 30 percent of the funds the government contributes to cover individual pension contributions to Turkish equities. The previous target was 10 percent.

According to HSBC, the government will match 30 percent of pension contributions up to an annual minimum wage.

Funds are also allowed to increase the weighting of a single stock in their portfolio from 1 percent to 5 percent.

Erdoğan has already pledged TL10,000 (US$530) in support to families affected by the earthquake, but economists expect further measures in the coming weeks to cushion the financial hit of last Monday’s earthquake.

Clemens Grafe, an economist at Goldman Sachs, said much of the reaction would come from government spending, but that the central bank could also try to provide a boost by lowering the cost of borrowing. Turkey’s central bank cut interest rates last year even as inflation rose to over 85 percent in October, and analysts fear further moves to ease monetary policy could push price growth back up after it started in recent months to cool off.

“There is a high risk that interest rates will be cut and after the introduction of various support measures by the banking regulator. . . for those affected by the disaster,” Grafe said, citing extended grace periods for loans and higher credit card spending, as well as the easing of other rules for consumer banks.

According to economists and analysts, Turkey’s debt burden is considered manageable for an emerging market with speculative creditworthiness. According to a FactSet survey of economists, the country’s debt-to-GDP ratio should be around 37 percent by the end of 2022 — giving the country some wiggle room to borrow for earthquake response and relief efforts.

Still, a yawning current-account deficit and high inflation make the country financially vulnerable, meaning “finding market financing at reasonable returns on the scale potentially required will not be easy,” Grafe said.

Grafe added that bilateral funding is important to fund the relief and reconstruction efforts. The World Bank announced $1.8 billion in aid last week, while even before the earthquake, financing from the Middle East and Russia was becoming increasingly important to the Turkish economy. Turks living abroad, many of whom hail from the affected south of the country, could also make a contribution, Grafe said.