Page 51 - TURKRptJun19

recession.
Textbook mishandling The Turkish government’s mishandling of the crisis might also be said to be a textbook case. It is still demanding lower interest rates while attempting to put the brakes on the currency depreciation. It also bangs its head on the brick wall of basic economic theory by demanding both a recovery from double-digit inflation and recession at the same time (at this point, fight inflation and tolerate a far heavier recession, or fight recession and accept hyperinflation is unavoidable). And it holds its nose at the idea of going to the IMF for a rescue, while putting itself at odds with the very domestic and international market players it needs to help it try and avoid such a fate. “#trilemma in action in Turkey. Slightly less liberal capital account, slightly more room to ease monetary policy,” noted Inan Demir of Nomura on May 21 in a tweet. According to the Reuters analysts, the government has four options right now: borrowing time on the capital markets, the IMF, capital controls or a policy rate hike. The government’s borrowing costs may have shot up but Turkey is nowhere near being locked out of the international capital markets as yet, according to the news service. “With a relatively comfortable debt to GDP ratio—expected to climb to around 35% by year-end, which is lower than most heavyweight emerging market countries—it could look to secure some cash and replenish some of its spent reserves.” In the latest 10-year eurobond auction held in January, the government paid a yield of 7.68% to raise $2bn. The issue now yields more than 8% and debt capital markets bankers and fund managers now reportedly predict Turkey would have to pay an additional 40- 60bp for any new issue. But the Erdogan administration does not think about tomorrow. It is for ever struggling to save the day. That has, at least, been the case since 2013. So, if the overarching need to access some cash is there, the nod to pay the extra yields is all too possible.
How it could it be any other way? Erdogan’s stance against the IMF—this glorious president said never again would Turkey need the institution, so how could it be any other way?—and his unsuccessful attempts to secure some financial support from a series of countries, including Qatar, China and Germany since last summer, are there for all to see in the rear-view mirror. So now, his game plan needs those capital controls.
No capital controls, you say? It seems that the international markets want Erdogan to step in front of the cameras and announce that he has indeed introduced capital controls to believe they are there. But there’s really no need. If closing down the London lira swap market, bringing in a Tobin tax, controlling FX purchases higher than $100,000, imposing deposit and lending rate ceilings on banks, pushing private market makers to buy government bonds at lower than market prices, launching fruit and vegetable stalls to combat the private sector with fixed state prices, imposing price controls, raiding onion warehouses and so on are not capital controls then I apologise and will start this article again forthwith. There is also a big question mark over how another policy rate hike would now help as the central bank’s monetary policy is dysfunctional in the face of massive dollarisation, the government’s interest rate ceilings placed on lenders and officials’ manipulation of the domestic debt markets. “We think that other measures will replace the monetary tightening as the local election taking place next month is another political inflection point. As a matter of fact, we believe that Turkey will move closer to controlling the market via regulatory measures instead of high benchmark rates. The short- term impact of such a substitution strategy on the local exchange rate is questionable. However, in the mid-term this should bring down FX volatility,” Sebastian Petric of Raiffeisen Bank said on May 22. Bringing down FX volatility by regulating the market is actually an interesting perspective. Mr. Petric could think of investing in Iranian debt as FX volatility is zero in the country when the FX black market is overlooked.
Waking up to puzzling inflation rates. It is also notable that Reuters shows signs of waking up to how, through the official lens, Turkey’s inflation rate is puzzlingly slowing in an import-dependent environment where the TRY has lost around 13% of its value against the USD so far this year. Although Reuters
51 TURKEY Country Report June 2019 www.intellinews.com