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32 I Cover story bne April 2021
Turkey’s debt ‘least appealing in EMs’
bne IntelIiNews
Turkey’s external sovereign debt has become the least attractive asset offered by developing countries after President Recep Tayyip Erdogan’s latest firing
of a central bank governor, according to Shamaila Khan, head of emerging market debt at global investment management and research firm Alliance- Bernstein in New York.
“Credibility, unfortunately, has been lost for the medium term for this [Turkey] administration after what they did over the weekend, which I would classify as one of their biggest policy missteps,” Khan said in a Bloomberg TV interview.
The best case scenario for Turkey would be to stabilise markets, she said, though valuations were unlikely to rebound to what they were before the March 19 sacking of Naci Agbal, a central bank governor who was finding favour with the markets after embarking on a course of aggressive tightening to fight Turkey’s high inflation rate.
Erdogan’s decision to replace the central bank chief may have several policy implications, none of which were likely to be positive, Khan said.
‘Only path is orthodox’
“Politicians want growth, they want to reduce unemployment, however, the only path to do so is to maintain orthodox polices for a prolonged period of time and there’s unfortunately no bandwidth [for this with the Erdogan administration].”
Khan anticipated that exchange-rate depreciation and concern over the cred- ibility of the central bank would now feed into inflation.
The new central bank governor is Sahap Kavcioglu, seen as an AKP ruling party loyalist who, like Erdogan, is opposed to the use of high interest rates to curb soaring inflation, unconventionally arguing that it indirectly pushes up prices. He has said the monetary authority will “continue to use the monetary policy tools effectively in line with its main objective of achieving a permanent fall in inflation”, but his actions will remain under close scrutiny as nervous investors look to see whether the central bank has any credible inflation- fighting credentials.
Erdogan is under fire for running ‘boom and bust’ economic policies under which cheap credit is used to inflate the economy in an unsustainable fashion.
The fear is that Turkey is on the cusp of another currency crisis, having not satisfactorily dealt with the aftermath of the August 2018 currency crisis.
Turkey's overall short-term foreign debt, falling due in the next 12 months, reached $140bn, about one-fifth of GDP, in January.
There are anxieties that Turkey’s banks are in a weak position to service their debts.
cuts, and surely that will reverse any improvement in the current account, un-anchor inflationary expectations, push dollarisation and capital flight. It will then crush the lira.”
If there’s one thing analysts agree on, it’s that the lira is likely headed lower: Societe Generale, Commerzbank and Rabobank all see the currency dropping around 20%. But with the last scintilla of predictability in Turkish monetary policy now blown to the wind, who
can really know?
Commerzbank says its year-end lira forecast of TRY10 to the dollar from around TRY8 at the end of March is purely “symbolic.”
“It’s just a way of labelling the prob- ability of spiralling lira weakness,” said Ulrich Leuchtmann, head of currency strategy in Frankfurt, as cited by Bloom- berg. “We find it impossible to identify a precise break point.”
Things have been bad, but the worst could yet to be to come. Turkey needs to cover a $75bn external financing gap this year and has no gas left to burn, having already spent almost all of its FX reserves. With the coronavi- rus (COVID-19) pandemic showing
no sign of abating, it is also unlikely
to earn much from tourism, one of its bigger hard currency money-spinners. And the backdoor capital controls that are already in place will only make it harder to raise any money at all.
Kavcioglu tried to talk the market down on March 29, saying that there prob- ably would not be a rate cut at the next monetary policy meeting in April, but his comments had no impact on the exchange rate.
“He should have said there might be
a rate hike,” said Ash on the same day. “That might have had an effect, but everyone knows that he can’t hike rates unless Erdogan says so.”
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