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The present global bond market mood has gone ultra-positive based on strengthening expectations for a renewed easing cycle from the Fed. If the cycle proves to be like previous ones, enough capital to finance populists and dictators everywhere will rain down. On the risk front, plenty of ugliness could be on the way with a worsening trade war, a global recession, growing geopolitical tensions and bubbling asset prices. But markets for the most part remain blithe, with only the shrewder analysts noting, to toy with a phrase from Keynes, that “we are all dead in the medium run.''
Global finance outlets find it hard to acknowledge the current, brewing conditions; they just keep doing what they did in the good old days when they had some teeth. “A serious meltdown in the lira last summer started on July 24, when the central bank shocked financial markets by keeping interest rates on hold, confounding expectations of a hike,” Ziad Daoud of Bloomberg wrote on July 18 in an op-ed entitled “TURKEY PREVIEW: 300-bp Rate Cut Could Spark Lira Crisis Redux”. It should be observed that the lira market was still a relatively open and free market last summer, and Erdogan was yet to show the door to foreign investors by temporarily shutting down the offshore lira swap market in London. Bloomberg forecasts that the central bank will cut its main policy rate by 300bp to 21% at its next monetary policy committee (MPC) meeting to be held on July 25, although it estimates that the financial markets are only pricing in a cut of 200-250 bp.
As the central bank long ago lost its independence—in a coup de grace, Erdogan last week fired its governor by presidential decree and installed his new man, who will be expected to do his bidding and cut when told— and, as a result, its relationship with logic and econometrics, Bloomberg’s methodology in concluding that a 300bp rate cut should be pencilled in amounted to a perfect parable in understanding how market commentators produce such forecasts. As an initial step, Bloomberg takes Erdogan’s official inflation data along with his monetary commentary in earnest. “The president sees inflation falling to single digits by year-end and expects interest rates to be cut in ‘a serious manner.’ Let’s assume he’s aiming for 9% inflation in December,” Daoud wrote, adding: “The newly-appointed governor, Murat Uysal, vowed to preserve ‘a reasonable rate of real return’ for investors. Let’s assume this means 3% of real interest rates.” In looking to define “bold assumption”, the Oxford English Dictionary could do worse than offer up Bloomberg’s assumptions as an example. Based on those assumptions, Bloomberg reaches the conclusion that “the policy rate should be 12% at year- end, about 1,200 bps lower than current levels”. With only four MPC meetings remaining this year, Erdogan’s view implies 300bp of cuts at each meeting starting with next week’s, according to Bloomberg.
Ignoring the financial deficit. Alongside falling inflation, another positive argument for the Turkish macro picture suggests that Turkey’s shrinking current account deficit reduces the country’s economic vulnerabilities. This argument holds only when the financial deficit in the balance of payments caused by debt repayments and capital outflows is ignored. Even if the ongoing collapse of the real economy is added to the picture, the key macroeconomic factors do not seem to make an impact on Turkish market sentiment as long as Erdogan has some USD to sell in exchange for TRY.
Where foreign policy risks are concerned, Erdogan has also managed to frame his game. There is currently far too much noise in the foreign media about Turkey in comparison to little action. Erdogan, with his skill for angry, populist rhetoric, has benefited from this scheme for a long time.
Also on July 18, a “harsh” op-ed entitled “Turkey Has Abandoned the West. Good Riddance” by Bloomberg’s “Editorial Board” was published. The arguments set down, starting from the headline, were pure orientalist fable, reminding one of Marco Polo. Even if we overlook how Bloomberg still takes it as a given that some genuine strong alliance called “the West” still exists despite the unilateralist Trump’s tenure in the White House, a more realistic
8 TURKEY Country Report August 2019 www.intellinews.com