Page 29 - TURKRptAug20

The “​unprecedented monetary easing​”, ​combined with an asset ratio pushing local banks to buy government bonds, helped drive the share of foreign ownership of Turkish government bonds down to a record lows below 4%.
The central bank’s share in domestic government bonds stands at about 8% while local banks had more than 60%.
“​The Erdogan administration is pump priming growth through the credit channel aggressively​, with 30-50% YOY rates of credit growth, and Turkey seems to be something of an odd one out, or exception, in this global deflation theme,” Ash noted.
“Therein also perhaps ​locals​, given ​continued dollarisation​ in terms of local deposits, which remain close to record highs at around the $200bn level. The fact that ​neither foreign portfolio investors not local retail/corporate depositors want to hold lira​ is quite telling,” Ash wrote.
“At ​the heart of the problem is the political economy​. And economic policy is Turkey is driven by the political and electoral cycle – and ​the Erdogan administration is almost always in election mode​. It always feels the need to deliver growth to create jobs and the feeling of prosperity to underpin its electoral support,” according to Ash.
“And historically growth has been driven by credit – and lots of it – and most of this has been foreign funded. But what is changing now is the CBRT [Turkish central bank] has figured out the wheeze of funding this credit growth by utilising domestic FX savings in the form of the weight of FX deposits in the banking system,” Ash wrote.
“The CBRT and Turkish policy makers seem to think they can use smoke and mirrors to deceive when it comes to the ​impossible trinity​ to deliver a stable currency, high growth and low inflation. Their version of it is the “wheeze” of recycling the large/rising stock of local FX deposits, through state owned banks to defend and anchor the exchange rate, sufficient to allow them to cut policy rates to spur high real GDP growth and a political dividend,” he wrote.
“But while growth might be rebounding, high and sticky inflation is a reflection of the fact that the policy is not really working, and continued dollarization and capital flight by foreign portfolio investors is evidence of this,” according to Ash.
“Evidently neither local deposit holders nor foreign portfolio investors think the carry is enough to compensate for inflation and ultimately exchange rate risks,” he wrote.
“And frankly few people believe that the CBRT has discovered macro nirvana on the impossible trinity through the recycling of FX deposits – whether this is hidden through a technicality of how these swap transactions are recorded on the CBRT balance sheet, the reality is clear to most objective economists that the CBRT is spending other peoples’ money. Those other people are depositors,” according to Ash.
“And it is true that gross reserves are really all that matters from a central bank FX management perspective, or they are all that matters until they don’t – as recent experience in Lebanon reveals​,” Ash noted.
“It has to be deeply troubling that while the CBRT has been able to keep headline gross FX reserves more or less unchanged this year, its net position has deteriorated to the tune of anywhere from USD22-50bn, again depending on how swap transactions are accounted for,” he recalled.
29​ TURKEY Country Report​ August 2020 ​ ​www.intellinews.com