Putting Uzbekistan, Turkey, and Ukraine under the microscope
The month of November was positive. Markets trended upward with justification in some situations and bet on pure hope in other situations.
December may provide a reversion to the mean. That said, below are three markets to watch:
Uzbekistan
Betting long on the banking sector…not sure yet
Uzbekistan is changing…it has been a long four years since the death of former Uzbek President Islam Abduganiyevich Karimov and his iron-fist style of rule. Since then, his successor President Shavkat Mirziyoyev has aggressively pursued transformation of the Uzbek system with a focus on enhancing the rule of law and transparency and greater engagement with the world. Ambitious efforts to open the market, including the privatization of Uzbekistan Airways and Uzbekistan Railways, will, if successful, be the codification of Mirziyoyev’s big promises last year. A succession of bond offerings, beginning with Uzbekistan’s inaugural Eurobond in February last year and followed by the National Bank for Foreign Economic Activity of the Republic of Uzbekistan (NBU) and Ipoteka Bank, is also promising.
On the face of it, there is little to worry about with the banking sector (and overall financial sector), excluding the usual political risk. Still, critics of the country’s banking sector raise some valid points. First, one of the country’s main exports is natural gas – a sad reality for this landlock country surrounded by other landlocked countries. Uzbekistan, by way of geographical location, struggles to be price competitive in a world where the trend is to liquefy gas and transport it in tankers around the globe. Furthermore, China and Russia, which accounted for nearly 80% of Uzbekistan’s $2.3 billion gas export industry, cut their imports by roughly 65% and 100% respectively during the pandemic this year. The Uzbek government is attempting cover the massive gap by constructing a local consumption market for gas products, including gas-to-liquids (e.g., petrol) and petrochemicals.
Despite these endeavors, there will be more cash invested than cash created in the initial years, which could spell trouble for the many state-owned banks already holding significant amounts of government related debt. Buying long on the country (and political change) may make sense…not sure if the same can be said about the banking sector. The reality of low economic diversification and weak competition is hard to ignore when gas exports are trending down. The overhang of autocracy and potential state intervention may be overstated…but it is real.
Turkey
Turning the corner…or a blip in the trend?
What a month it has been for Turkey. The departure of President Recep Tayyip Erdogan’s son-in-law Berat Albayrak, which was announced via Instagram on 8th November, shocked the market for its abruptness and timing. The Turkish leadership was seemingly caught off-guard, taking a couple days to confirm Albayrak’s departure and his replacement Lutfi Elvan, a former deputy prime minister. Despite Albayrak’s statement that he was leaving for health reasons, political analysts and insiders believe the departure was in response to the appointment of the new central bank governor, Naci Agbal, who was previously critical of Albayrak. Erdogan installed Agbal in his position on 7th November after sacking Murat Uysal, likely without consulting Albayrak. Nevertheless, all this news led to the best weekly performance for the lira in nearly two decades.
Still, the question remains whether the current recovery is a blip or a trend for the country. The currency lost roughly 45% of its dollar value between Albayrak’s ascension to the post in 2018 and his resignation. Thus, there is a long recovery ahead if the lira is to rebound to 2018 levels. The announcement on 11th November that restrictions on foreign trading of the lira would be lifted was promising and especially bold considering that the limit had been created to stop foreigners from short-selling the currency. Let’s hope it is not a showmanship of false confidence.
Agbal and Elvan have also changed the tone coming from Ankara with all the rhetoric focused on combatting inflation and stabilizing the currency. A rate rise was imposed by the central bank and was preceded by Erdogan suggesting “a bitter pill” and austerity for the Turkish economy. Yet, foreign investors are rightfully confused between re-engaging with Turkey or disregarding the overture as a suave maneuver to buy the embattled economy and its leader some more time to address internal challenges. Erdogan will not abandon his nationalistic style, i.e. his administration will remain significantly involved in the economy with a focus on growth and tight oversight on national institutions. So the debate boils down to whether a partially restrained Turkish government could be an opportunity for foreign investors…it is hard for foreign investors to walk away from this vital economy as it relates to Europe, Asia, and the Middle East. The next two months will be informative as to whether buying long on Turkey is less a fad of the week but rather a smart academic decision.
Ukraine
Sovereign Debt and the Banking Sector…misplaced excitement?
It is may be too early to assess the situation in Ukraine. But early bidders are surely watching the country and any potential economic benefit that may come from the election of Joe Biden to the U.S. presidency…Ukrainian sovereign Eurobonds traded up immediately following the president-elect’s victory (and the positive news surrounding a covid-19 vaccine). A Biden administration ostensibly suggests a U.S. interest in the country but it is not exactly clear that the concerns raised about Hunter Biden’s deals in Ukraine have been completely squashed to a level that they are not a political risk. In other words, Biden critics and adversaries will strategically question any Biden effort in Ukraine as being related to some version of a cover-up. That said, the former vice president knows the country and should provide Ukrainian President Volodymyr Zelensky some necessary political cover (and timeframe) for his reforms.
Although political cover and timeframe for reform may be helpful, the question for Zelensky is will power. Can his government push through the required IMF reforms and walk the necessary tightrope between maintaining Ukrainian sovereignty and aligning with the IMF’s perspective of the world? It is through these lens that the public will read Ukraine’s draft 2021 state budget, which was a long negotiation with the IMF on revenues, expenditures, and deficit indicators. All things considered, the trade-up in sovereign bonds and general excitement for Ukraine at the start of November appear more aspirational than founded in budget numbers and economics (which remain partly at the mercy of the IMF). For investors to be overly bullish on the Ukrainian market, especially its banking sector, is a paradoxical reality, at least, as it stands today.
