The Turkiye Wealth Fund’s (TVF) decision to prop up domestic public equities following the devastating earthquakes demonstrates the power of sovereign wealth funds in times of crisis, but do such short-term emergency measures compromise a SWF’s long-term mandate to invest for yield and economic development?
The TVF was deployed to intervene in markets following the earthquakes of February 6, which saw the Istanbul borse halt temporarily trading after the benchmark Borsa Istanbul 100 Index lost US$35 billion in value. TVF established a price stability fund to receive capital from state lenders to buy stocks and ease volatility, according to Bloomberg. Trading resumed on Wednesday (February 15) following the tweaking of rules that prevented the cancellation of orders and the lowering of order prices in the opening session. A decree was also issued in the Government Gazette to allow the Individual Retirement System (BES) – the country’s compulsory pension scheme – to increase its investment in the market. The proportion of government funds that can be invested in the stock market was increased from 10% to 30%, while the maximum amount that pension funds can invest in a single stock was increased from 1% to 5%.
The extent of TVF’s intervention in the markets is unclear, although it is thought the fund channelled “billions of lira” into the market. In the first day of trading since the earthquake the benchmark index grew by nearly 10%. By end-Friday it maintained its value and had returned to pre-earthquake levels.
The fast and decisive move by the Turkish government to prevent a market rout demonstrated the role SWFs can take in a crisis. TVF’s intervention is by no means unusual. Last year, Russia’s National Wealth Fund (NWF) was also conscripted to stabilize markets following Moscow’s “special military operation” in Ukraine with US$1.3 billion in funds to recapitalize national flag carrier Aeroflot.
The Russia example also demonstrates the challenges facing a SWF as it is increasingly called upon to support the economy and fiscal policy amid an extended crisis – and the temptation to rely on them as a cash cow. The NWF is being pulled in several directions at once. Oil and gas revenues were diverted away from the fund to support wartime government spending, while assets have been frozen in countries wielding sanctions, and resources have been deployed to emergencies in the private sector, such as the recapitalization of Aeroflot. The Reserve Fund, which was supposed to manage oil and gas income, was depleted the wake of Russia’s annexation of Crimea and a resulting wave of Western sanctions in 2014.
The NWF was supposed to collect oil and gas income, with the cut-off set at US$45/b in 2022, to invest in foreign currency and other less liquid assets. With the government set to depend on the NWF to cover the deficits at least partly over the next three years, while the oil price cut-off under the fiscal rule was increased to US$60/b to divert funding for the government in 2023, there is a clear risk that the NWF will follow the plight of the Reserve Fund, at least in terms of the diminishing liquid assets.
At the beginning of 2023, the fund stood at US$148.4 billion, equivalent to 7.8% of GDP, having fallen US$38.1 billion in December, as the government drew on the fund to reduce the budget deficit. This has left it with just US$87.2 billion in liquid assets, equating to 4.6% of GDP with the prospect that they could fall to 1.4% of GDP by 2024. Before the invasion of Ukraine, in February 2022 the fund’s AUM was US$174.9 billion, or 10.2% of projected GDP.
Last month, Russia’s Ministry of Finance proposed scrapping liquidity restrictions for spending on "anti-crisis" investments from the NWF to support strategic sectors of the economy and that the total volume of such investments do not exceed RUB4.25 trillion roubles (US$61 billion).
TVF does not face the global isolation and depth of geopolitical risk facing the Russian sovereign fund nor does it rely on oil and gas reserve income. Yet, Turkiye is still facing significant structural problems. For example, consumer price inflation in Turkiye came in at 57.7% year-on-year in January, which will undoubtably be worsened by the impact of the earthquake. Yet, the earthquake-affected areas are less likely to require an extended crisis support from TVF. The last time such an earthquake hit the country was in 1999 when the disaster impacted western parts of the country, which represented close to 35% of GDP. The February 6 earthquakes impacted a poorer, less developed part of the country which represents around 10% of GDP. The impact is therefore likely to be limited. Yet, if the Turkish government becomes dependent on TVF for support, it could end up like NWF: facing depletion.