Turkish Government Orders Private Pension Funds to Increase Holdings of Turkish Stocks in Wake of Earthquake

Turkish President Recep Tayyip Erdoğan’s government has ordered private pension funds to increase their holdings of Turkish stocks in an effort to bolster financial markets in the wake of a sell-off triggered by last week’s earthquake. The decision, announced on Tuesday, comes as Istanbul’s stock exchange is set to reopen on Wednesday following a six-day closure. The Bist 100 equity index has fallen by 18% this year, with concerns about a May election having been compounded by the earthquake.

The Turkish government has previously faced criticism of its handling of the disaster, which has killed over 31,000 people in Turkey and thousands more in Syria. Critics have also pointed to building standards as contributing factors to the scale of the tragedy. Erdoğan has already promised TL10,000 ($530) in aid to affected families, with more measures expected.

Private pension funds will now be required to allocate 30% of the funds that the government contributes to match individual pension contributions to Turkish stocks, up from a previous requirement of 10%. In addition, the weighting of a single stock in portfolios can now be increased to 5%, up from 1%.

While investors are likely to react positively to the announcement, some analysts have warned of potential problems resulting from the regulatory changes. Murat Gülkan, chief executive of OMG Capital Advisors, noted that the changes could “impede healthy price discovery and will lead to greater problems down the line”. The move is seen as politically expedient ahead of elections, although it is unclear how it benefits pension fund investors.

Further measures to reduce the financial impact of the earthquake are expected in the coming weeks, with economists predicting that the response will rely heavily on government spending. Clemens Grafe, an economist at Goldman Sachs, noted that Turkey’s debt-to-gross domestic product ratio is expected to end 2022 at around 37%, which provides some headroom to borrow for relief efforts. However, concerns about the country’s high inflation and yawning current account deficit mean that it will be challenging to find market funding at reasonable yields. Bilateral funding and contributions from Turks living abroad are likely to be important sources of financing.

The announcement of the requirement for private pension funds to increase their holdings of Turkish stocks has come as the government seeks to respond to a tragedy that has highlighted the country’s vulnerabilities. While the move is likely to provide some support to the markets, the broader picture suggests that there are significant challenges facing Turkey as it seeks to recover from the disaster.