Page 17 - TURKRptDec19

The response was not very credible. A first response was that this was not a policy prescription but just reflected the result of dollarisation, which resulted in local banks being flush with dollar liquidity and in need of no more provided through offshore SWAPS—they also preferred TRY. A second, was that the blame rested with foreign banks which could provide TRY liquidity onshore to foreigners, but had been unwilling to sufficiently boost their capital to enable such liquidity provision. There was little acceptance that this was a specific policy response to offshore shorting of the lira in the summer of 2018, and restricting liquidity to the offshore market helped to stabilise the lira, albeit at the price of limiting portfolio inflows subsequently to the TurkGB market. Indeed, on the latter note it is striking that in an environment where policy rates have collapsed by over 1,000bps, and the lira has remained stable, portfolio inflows have flatlined this year, and foreign holdings of TurkGBs have stayed only around 10%, from peaks closer to 25%. In previous years when similar disinflationary trends have been evident, portfolio inflows have totalled around the USD20bn mark.
This now seems a very micromanaged market. Dollarisation means banks are flush with dollar liquidity and can meet offshore FX liabilities falling due. This dollar liquidity is also available to state-owned banks which if market makers are to be believed have been supporting the TRY at times of geopolitical stress and post recent rate cuts. Long-term TRY liquidity is though in short supply—banks complain that swapping FX liabilities for TRY is expensive and longer-term liquidity is in short supply. With foreigners also reluctant to participate in Turk GBs, while the CBRT continues to aim to push short-term rates lower, this would suggest a steepening of the yield curve and crowding out at the longer end of the funding equation.
This also comes as the Treasury likely needs to borrow more and will want to move back out of the Turk GB curve to extend its maturity profile again. Net-net this again suggests that credit growth will disappoint and with it real GDP growth and job creation. The so called V-shaped recovery required to list Erdogan’s lagging poll ratings will be elusive. And this then risks more risky and unorthodox policy responses from the Erdogan administration. This might be a year or so out from here but the concern is that when this reckoning comes, what we know is that the CBRT will be unable to respond as it did in 2018. It will be unable to hike policy rates, because President Erdogan has made his position totally clear in this regard—interest rates cause inflation.
** Please note that any views expressed herein are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions. The views expressed do not reflect the opinions of all portfolio managers at BlueBay Asset Management, or the views of the firm as a whole. In addition, these conclusions are speculative in nature, may not come to pass and are not intended to predict the future of any specific investment. No representation or warranty can be given with respect to the accuracy or completeness of the information.
17​ TURKEY Country Report​ December 2019 ​ ​www.intellinews.com