Page 49 - BNE_magazine_05_2019

bne May 2019
Opinion 49
member it will go ahead and buy Russia’s S-400 advanced missile defence system, seen as a security threat to mightily expensive military hardware including the F-35 jet, is also an obstacle to Turkey finding its way out of the woods.
“Am in D.C. and mood on Turkey is sombre/worried in terms of relationship with the US,” Ash wrote on Twitter. “But
seems resignation that S400s are delivered and Turkey is sanctioned... only hope is Erdogan-Trump personal ‘chemistry’ to pull back from brink.”
He added: “If I were Albayrak now, I would cancel all investor meetings in D.C., and focus on trying to sort S400 out and sit down with the IMF to figure out what the shape of a new IMF programme would look like. Don’t waste his time in D.C. on other stuff.”
Refinancing season progresses undeterred
Despite the new wave of turbulence to hit Turkey, it is notable that Global Capital reported on April 11 in a story entitled “Turkish reforms disappoint, but loans unfazed” that Turkish lenders’ loan refinancing season was progressing undeterred, even if Albayrak’s only numerical promise – providing a TRY28bn ($4.9bn) capital injection for the state banks – left bond investors less than over the moon.
Also on April 12, Moody’s Rating Services agreed in a research note that Albayrak’s economic reform program was light on content and details, and that Turkey’s economy remains beset by structural problems.
Moody’s expects Turkey’s budget deficit to come in at 3.3% of GDP in 2019 versus the government forecast of 2%. In
his presentation, Albayrak kept to the government’s GDP growth and inflation forecasts of 2.3% and 15.9% for 2019, respectively, but Moody’s expects a 2% contraction in growth and headline inflation of 17%.
A lack of transparency around the Turkish banking industry’s NPL ratio remained a concern and the risk in Turkish banking assets continued to worsen, the rating agency also said.
Looking at the latest weakening trend dragging down the lira, Ash tweeted: “If experience of 2018 is anything to go by, CBRT [Turkish central bank] needs to get ahead of curve by hiking policy rates. Need Istanbul election [decision on whether to accept the validity of the opposition win] and S400 resolution and/or IMF assistance.”
Growth/lira trade-off
“The dilemma facing Turkey is a trade-off between growth & Lira stability. The Q1 credit expansion boosted GDP, but at the cost of a wider current account deficit, which destabilized the Lira. Short term the only solution is accept slower growth. Medium term it's to reform,” Robin Brooks of the Institute of International Finance (IIF) wrote on Twitter.
“The Turkish finance minister’s economic reform plan unveiled this week was light on details and provided worrying signs that the government may lean on state banks to drive an economic recovery,” William Jackson of Capital Economics said in a research note headlined “An interventionist streak”.
He added: “As things stand, state banks’ aggregate total capital adequacy ratio of 14.9% is much higher than the regulatory minimum of 8% (and the capital ratio would rise to almost 18% of risk-weighted assets after the capital injection). It may be that nonperforming loans are actually higher (and capital positions weaker) than recorded, or that some state banks have much weaker balance sheets than others.”
Jackson also noted: “More fundamentally, it’s unclear what Mr. Albayrak could really do to reassure investors so long as President Erdogan (his father-in-law) continues to take a more unorthodox approach to economic policy. For our part, we’ll pay more attention to the economic data and the central bank’s actions to judge whether there is a shift in policymaking.”
Jackson went on to voice his concerns over Albayrak’s fuzzy reform package, given his past experience of the Erdogan administration, writing: “However, the capital injection could also allow state banks to expand their balance sheets and loosen credit conditions. These banks were already under
“I don’t think he persuaded anybody, it did not go well”
pressure to boost lending ahead of March’s local elections. This seems to have helped the economy to stabilise.
“But it has also come alongside a modest widening of the trade and current account deficit. In this context, it’s worth bearing in mind that the government’s credit guarantee fund [KGF]– launched after the coup attempt in 2016–supported a sharp rise in bank lending and also contributed to the widening current account deficit that triggered last year’s crisis.”
Bare cupboard
In another reflection on how Albayrak’s reform plan pretty much amounts to a bare cupboard given the scale of the economic morass Turkey finds itself in, one investor told Reuters that at the Washington hotel event the finance minister pointed to a recent dip in inflation and an improving current account balance to argue that Turkey was doing much better today than it was last October, when it was emerging from its major currency crisis. Unorthodox (or just plain nutty?)
Erdonomics might blithely contend that the Turkish economy
is doing “much better” – after all look at how Erdogan was prepared early last year to go to London and declare to all and sundry (including Bloomberg Television) that, yes, high interest
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