Page 20 - TURKRptSept19

The positive market impact of the rate cut by the Fed at the end of July lasted for around two weeks before the rising trade war tensions drowned sentiment.
Easing prospects as regards the Fed were given as the reason for the lira strengthening seen from the last week of July to August 8, but portfolio inflow data do not support that argument. According to the latest data from the central bank, net portfolio inflows into Turkey amounted to only $224mn from July 19 to August 16. From July 5 to August 16, foreigners’ net purchases of Turkish domestic government bonds amounted to only $499mn. That sum is less than the daily volumes public lenders sell to keep the local currency under control.
After Turkish President Recep Tayyip Erdogan sacked the central bank governor on July 5 with a presidential decree, his comments suggested that bold rate cuts were unquestionably on the way. Under normal conditions, hot money should have rushed into Turkey to benefit from guaranteed arbitrage. On July 15, the newly-appointed central bank governor voiced for the first time the principle that the national lender should provide a “reasonable real return”. On July 25 when the 425bp rate cut was executed, the monetary policy committee openly said in its press release that it expected monetary easing from the world’s leading central banks and subsequently rising risk appetite for emerging market assets.
The Turkish government obviously hoped for the portfolio inflows it enjoyed during previous easing cycles.
‘Pendulum strategy’. Erdogan, it seems, thought he would stick to his ‘pendulum strategy’, swinging between favouring the US and Russia, and, at the same time, work on reversing his significant loss of popularity—demonstrated by the losses in big cities he suffered in the end-of-March local polls and, even more humiliatingly, in the Istanbul ‘revote’ in June—by using his full control of the state apparatus.
Previous easing cycles have provided Erdogan with a free hand in his survival efforts. But this time things are different. The present situation is a long way from meeting Turkey’s financing needs.
Erdogan’s troubles in Idlib, where Turkish troops are now under pressure from Russian-backed forces sent by Damascus, are also used as an argument for explaining the latest bout of depreciation in Turkish assets. The Turkish strongman was on August 27 in Russia where he was attempting to convince his Russian patron, Vladimir Putin, to stop the military advances in Idlib.
Russia is the biggest beneficiary of a weak Erdogan. The Kremlin would not trigger trouble so serious that it could threaten Erdogan’s continued rule in Turkey.
However, the Russians make pretty good use of Erdogan’s pendulum swings.
Hasty trip to Moscow. After Erdogan earlier this month entered into an open- ended agreement with the US regarding the fate of Washington’s Syrian Kurd allies in northeastern Syria, the Russians in typical fashion used this latest swing to the Americans as a reason to advance in Idlib. Hence, Erdogan’s hasty trip to Moscow (where he has been seen countless times in recent years).
On August 27, Erdogan attended an aviation fair in Russia just as a second shipment of Russian S-400 advanced missile defence systems were being delivered to Turkey. Briefings given at the fair made it clear that Putin is now leaning on Erdogan to buy Russian fighter jets to replace the US F-35s that Nato member Turkey can no longer get its hands on given the threat that the S-400s could, according to irate US senators, pose to the
20 TURKEY Country Report September 2019 www.intellinews.com