Page 58 - TURKRptJun19

In a research note entitled “Three key points on the latest EM currency “sell- off”, Edward Glossop of Capital Economics said on April 30: “In Turkey, political risks have several strands but all come back to deteriorating policymaking under President Erdogan... Stepping back, both [the Argentine peso and Turkish lira] are vulnerable to investor risk aversion because external positions remain weak. “While last year’s currency crises have caused current account positions to improve, both countries still have large gross external financing needs due to high short term debts. Moreover, there is a clear risk that currency falls themselves exacerbate political risks by keeping inflation high and economies weak... While the Turkish lira and Argentine peso have already fallen a long way in real terms over the past year, high inflation, large gross external financing needs and political risks mean they will probably be hit harder than most.”
“Recent Turkish Lira weakness stems from another large credit expansion in Q1, with global capital markets unwilling to fund credit- dependent EM growth models,” the Institute of International Finance (IIF) said on April 25 in a research note entitled “Credit-Dependent Growth in EM”.
“One lesson from the 2018 EM sell-off is that global capital markets have grown unwilling to fund heavily credit-dependent growth models. Turkey was in the crosshairs because of a large credit expansion in 2017 that widened the current account deficit to unsustainable levels... Depreciation pressure on the Turkish Lira has recently been rising again, a direct consequence of another ramp up in credit in Q1, which this time has been led by state banks. The resulting credit impulse to the economy is larger in our models than in 2017, once again widening the current account deficit and—as a result— destabilizing the currency,” it added.
7.2 Lira under control of “invisible hand”
Public lenders are currently selling local banks’ required reserves held at the central bank, along with amounts raised through FX swaps—put more frankly, FX deposits at local lenders—to curb the renewed depreciation of the Turkish lira. The central bank’s own net reserves are calculated as a negative figure, excluding FX swaps.
58 TURKEY Country Report June 2019 www.intellinews.com