Turkish President Recep Tyyip Erdogan (C), gestures while delivering a speech at the annual evaluation meeting for 2019, with the backdrop banknotes representing the Turkish Lira. Ankara. 16 January 2020.
According to Ozan Ozkural (managing partner at Tanto Capital Partners, a boutique investment firm), investors need to avoid Turkey’s unpredictable fiscal and monetary policies until normalcy is restored.
The country has around 85 million inhabitants. This means that inflation is close to 20%. It also means that prices for basic goods are on the rise, while wages in local currencies have declined significantly.
Ozkural, speaking to CNBC’s Squawkbox Europe on Wednesday, said that the issue was not only with the counter-intuitive loosening in monetary policy by central banks all over the world, but also with how it is carried out.
Ozkural explained that “investors like nothing less,” and said, “Investors, you can’t get enough of an unpredictable fiscal and monetary policy.”
“In the current context, I can’t imagine any investor coming in to the country for the short term until these changes.”
Recep Tyyip Erdogan, Turkish president, has supported his central bank’s ongoing loosening monetary policy. He has advocated this approach in an effort to lift “this scourge” of interest rates off people’s backs.
As investors flee Turkey, the central banks has reduced their main policy rate by 300 basis point since September.
Ozkural stated that Turkey is large, geostrategically important and has shown resilience to crises.
However, he said that Turkish assets present too many uncertainties even over a longer period of time.
“In this current climate, until we shift to a fundamentally credible reformist stance — within either this government or, whenever the elections take place, the next one — it is very difficult to invest long term in the country right now,” he said.
It doesn’t diminish the importance and significance of Turkey for investors over the long-term.
The TCMB needs to make fundamental changes in its function
Since trading at 3.5, the lira is sliding. the dollarIn mid-2017, it was 13.44. This decline is largely due to geopolitical tensions. A substantial current account deficit and mounting debts fueled by shrinking currencies reserves. Erdogan’s opposition to interest rates hikes added fuel to the fire.
Goldman Sachs, however, stated Tuesday in a research note that “causes” of this sell-off are different from those of the past.
The current account deficit is the main vulnerability for 2020 and has been more than half as high this year. “We have only seen a slight acceleration in loan growth, and a small pickup in dollarisation,” Murat Unur, a Goldman Sachs economist and Murat Unur, a Goldman Sachs associate said.
Turkish President Tayyip Turkey speaks at a meeting of businesspeople in Istanbul (Turkey), January 15, 2021.
via Reuters| via Reuters
The experts also noted that the rates of debt rollover, portfolio flows and derivative exposures had not changed significantly in recent years.
According to us, the main driver of the selling was the effect rate cuts have on local expectations as well as the demand for TRY.
Grafe and Unur suggested that recent rate reductions represent a fundamental change in the TCMB’s reaction function.
“While it could be argued that the TCMB has been excessively dovish in the past — e.g., cutting deeply in 2020H1 and delaying rate hikes in 2020H2 — it has not run entirely counter to what domestic output and inflation conditions call for, especially at a time like this when the Lira is significantly under pressure and global financial conditions are tightening,” they said.
The difficulty of forecasting the future is made more difficult by the different TCMB response function and increased importance given to expectations.