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reform programme presented by Turkish Finance Minister Berat Albayrak on April 10 went down like a lead balloon with many analysts.
PowerPoint Man. Albayrak, developing something of a reputation as PowerPoint Man—it’s not just the content but the graphics of his show that leave something to be desired—also, appears to have fanned existing concerns by offering “scant” detail on how to deal in a sustainable manner with rising non-performing loans in the energy and construction sectors, support exports, improve pension savings and reduce food price inflation.
Government’s message contradictory. Albayrak’s reform package also includes promises to lower exemptions and reduce corporate tax, and to integrate the country’s severance pay fund with its private retirement insurance fund. However, his presentation proved difficult to swallow given the number of key statistics which sat uncomfortably next to each other. For instance, Albayrak said the current ratio of non-performing loans stood at a quite good 4.2%. Analysts think the ratio could nearly double this year but Albayrak did not downgrade government expectations for 2.3% GDP growth this year, even while the IMF anticipates a contraction of 2.5%.
Another dollop of pressure. Back with Fidelity, and it was seeing much better risk-reward in Turkey’s external debt compared to local currency bonds. The planned capital injection will of course need to be funded by issuing more foreign debt, adding another dollop of pressure to the government’s balance sheet. There’s no doubt there were plenty of traders out there watching Albayrak’s appearance, looking to benefit from bold fixed income and volatility returns. Their appetite has been whetted of late.
Surrealist stance. Albayrak kept to what some critics have come to regard as his surrealist stance in fiscal and budget discipline while not hesitating to hold forth a little on judiciary reforms despite the current travails of Justice in the nation (HRW had something to say about that with a new report on hundreds of arrested lawyers released on April 10).
Growth/lira trade-off. “The dilemma facing Turkey is a trade-off between growth & Lira stability. The Q1 credit expansion boosted GDP, but at the cost of a wider current account deficit, which destabilized the Lira. Short term the only solution is accept slower growth. Medium term it's to reform,” Robin Brooks of the Institute of International Finance (IIF) wrote on Twitter.
Bare cupboard. In another reflection on how Albayrak’s reform plan pretty much amounts to a bare cupboard given the scale of the economic morass Turkey finds itself in, one investor told Reuters that at the Washington hotel event the finance minister pointed to a recent dip in inflation and an improving current account balance to argue that Turkey was doing much better today than it was last October, when it was emerging from its major currency crisis. Unorthodox (or just plain nutty?) Erdonomics might blithely contend that the Turkish economy is doing “much better”—after all look at how Erdogan was prepared early last year to go to London and declare to all and sundry (including Bloomberg Television) that, yes, high interest rates drive up inflation and, yes, as president he should be a dominant voice in steering monetary policy—but a Washington audience of Wall Street-wise investors just ain’t gonna run with that. It’s no wonder that by all accounts Turkish central bank governor Murat Cetinkaya, who appeared at the hour-long presentation alongside Albayrak, said little. Who can blame him?
Palpable uncertainty. There’s still palpable uncertainty as to where things go from here. For instance, the median of a Reuters poll of 43 economists on April 12 gave an estimate that Turkish GDP will contract 0.3% y/y in 2019, with the range of forecasts ranging from growth of 2.3% to a contraction of 5.0%. Turkey’s GDP is expected to contract 3.4% and 1.2% in the first two quarters of 2019, respectively, before returning to growth of about 2.1% in Q3,
40 TURKEY Country Report May 2019 www.intellinews.com