Page 16 - TURKRptDec19

different to other crises in Turkey, in that the recession was balance sheet in nature—driven by too much FX leverage in banks, and across the system, and the extreme FX devaluation resulting, left NPLs across the system, many still likely hidden by pressures to extend and pretend. Banks and corporates are as a result likely to be slow to go back down the credit growth channel—and official hopes of 15% annual credit growth in 2020 might prove optimistic. Signs are that private sector banks are deleveraging, while they are struggling to access longer term TRY liquidity.
Second, consumers also seem likely to be reluctant to get back to old spending ways quickly. Unemployment remains high, while few people seem to believe the official inflation data. Perceptions will be that real living standards remain under pressure, and any feelgood factor is likely to be in short supply. Demand for credit, from SMEs in particular seems weak.
Third, on the inflation front, dollarisation has continued apace—at least nominally, albeit the authorities point out that with TRY deposit growth now outpacing FX deposit growth the dollarisation ratio is stabilising, even falling, but from now high levels. But still a high level of dollarisation suggests a fundamental lack of confidence not only in the inflation data, but the broader economic policy making. And I would think that this will be reflected in stalled consumption.
Fourth, global and European growth remains weak, and this has been reflected in export growth data—despite a highly competitive lira now, dollar export growth has disappointed, relatively speaking at least.
I would hence contend that growth will tend to surprise on the downside, perhap coming in more like 3% in 2020. The upside from this is that the current account deficit might actually remain more manageable—closer in fact, to the 1.2% MTP programme. We could also see inflation, at least that reported, also come in towards the bottom end of CBRT forecasts. And this could then see more scope for the CBRT to extend and deepen its current rate-cutting cycle—thereby pleasing its political master.
It’s possible then to present a benign outlook for fixed income markets, with growth and inflation surprising on the downside, and with the authorities continuing to micromanage the exchange rate, the lira might remain relatively stable (surprising towards appreciation)— notwithstanding potential geopolitics, hiccups.
But then returning to the political context, with support for the ruling AKP and Erdogan lagging and risks of early elections due to potential leadership changes at the MHP, can Erdogan risk low-balling growth? It seems unlikely—and this suggests extreme pressure then on the CBRT to do more to cut policy rates, on the Treasury to loosen fiscal policy and on banks to boost credit expansion.
Another Credit Guarantee Programme?
Now if developed markets policymakers keep policy loose, and global liquidity plentiful, the market might be forgiving of a scenario where nominal policy rates might be pushed well into single digits, real policy rates close to zero, and fiscal policy loosened, with risks to a rising current account deficit again. But I have my doubts in the context of the past two years’ experience of the Turkish policy setting where we know that if the lira cracks, and the CBRT needs to hike policy rates, Erdogan will only allow policy tightening when it is too late.
I would also question ​the willingness of portfolio investors to commit to local TRY GB trades​, when ​the offshore swap market remains broken​, and hedging opportunities are limited. We pushed policymakers on this very issue.
16​ TURKEY Country Report​ December 2019 ​ ​www.intellinews.com