Page 70 - TURKRptMay19

severely declined to only $307mn from $2.07bn . The descent in equity prices and the currency depreciation unfortunately do not explain the dramatic decline in foreigners’ stock of Turkish securities as the more eye-popping decline in bonds is mainly due to the Treasury’s efforts in suppressing bond rates in evidence since November. They have spooked foreign investors. The government has in the meantime kept the ship upright by cranking up external borrowing, but with the channels for that now seemingly closed there is a big question mark as to what it plans next. Budget metrics and the borrowing requirement have also deteriorated further compared to last year as transfers from the central bank have already been spent and there are growing payment obligations to idle mega infrastructure projects.
The Erdogan administration can wave its Oval Office photo at external financiers as much as it wants, and it may well find some thick-skinned investors who’ll deal, but only at the cost of higher and higher interest payments that would anyway only delay the collapse, just as has been the case since last September. And more significantly when it comes to the question we posed at the start of this article, those thick-skinned investors would demand a stark currency devaluation that would pave the way for a retreat in the local currency at the point they entered into the market.
So what about the IMF? The IMF option brings some obvious questions. When would the deal be ready? Would the US give its approval for IMF support (there are numerous unresolved disagreements between Ankara and Washington that could at any moment lead to a Twitter bombardment during one of Donald Trump’s critical moments of reflection during “Executive Time” in his private quarters)? And would Erdogan, once oh-so-proud of delivering what he said would be Turkey’s final goodbye to the IMF, countenance having the Fund re-entering the equation?
FX deposits hit historical highs. Another difference from last year’s time ‘before the fall’ is the situation with domestic confidence. Local individuals’ FX deposits have hit historical highs in the $109bns across March and April. At end-March 2018, the figure stood at $96bn before gradually declining to as low as $87bn in August last year in parallel with the path taken by the USD/TRY rate. It has progressively grown again since then in line with the suppressed USD/TRY.
The government will need to employ a currency devaluation to make locals sell their FX, or dollarisation can only keep growing .
Meanwhile, the central bank’s net international reserves were given as $27.8bn as of April 5, down from $30.2bn as of end-March . Recent developments in the central bank reserves have fuelled suspicions among some market commentators who have started talking of a “cooking of the books”.
The hand of manipulation has also allegedly been seen messing about with inflation . It officially stands at slightly under 20% versus about half that in April last year. Looking at the growth figures, there are some who are not ready to accept that they are dependable while the real conditions that Turkish banks are grappling with are also a mystery. A question mark now also dangles over the sustainability of shrinking the current account gap as Turkish unemployment and impoverishment have reached alarming levels.
Then there’s that ever important sentiment abroad . Despite a dovish Fed, it is deteriorating once more. “Our Tracker suggests that overall EM capital outflows eased markedly in Q1. However, we think that positive sentiment towards EMs will start to turn over the coming quarters as worries about weak global GDP growth weigh on investor risk appetite, causing capital outflows to rise and currencies to fall,” Capital Economics said on April 17 in its EM Capital Flows Monitor.
70 TURKEY Country Report May 2019 www.intellinews.com