Too Late to Save the Economy -Analysis #TurkeyEconomy
While the financial community remains fixated on Turkey’s unfolding currency crisis, guess what the great nation of Turkey is debating?
The leadership struggle in the main opposition party CHP. Orchestrated by a Stalinist zeal by AKP, the poor “main-stream” media is not allowed to report or—God forbid—to comment on the withering currency and its potential impact on the economy. One of the primary reasons for the currency collapse, the Pastor Brunson tensions with US, is only covered in terms of the gross injustice Trump is committing by interfering with the Turkish judiciary, complimented with outrageous claims of how this great nation shall never bow to the foreign oppressor. Missing amidst all the topics that intrigue commentators abroad and at home is the simple fact that it is too late to save the economy. Recession has started, and it shall not end easily, because this is Turkey’s first balance sheet recession. A fate similar to Brazil and Russia awaits the erstwhile “European Tiger” (remember those headlines dating back to 2011 in the Economist?)
Admittedly, US threats to levy painful sanctions on Turkey, potentially targeting financial institutions is the primary cause of the decline in TL and bond prices. As I write these lines, a Turkish delegation is in Washington DC to sort the mess out. The solution is simple, release the good padre, and return with former Halkbank executive Mr. Hakan Atilla.
The alternative is a run on TL, which will reinforce my assertion of a recession, and possibly exacerbate it with a currency crisis.
However even if the sorry saga of Father Brunson and incidentally Mr. Atilla ends well, the threats for the Turkish currency are not over. Swelling inflationary pressures necessitate rate hikes, while AKP’s boundless enthusiasm for growth and mega-projects, too needs to be tempered to hose down the overheated economy, which, is generating a current account deficit of 6.5% to GDP (estimated). Unless these measures are taken, investors, who have been fooled endless times by shameless lies and accusations of market manipulation shall not return to Turkey.
The economy is broken
The currency outlook brings us to the economy, where the exchange rate is central to all forecasts, for two reasons. First, it is the primary driver of pricing behavior and corporate profitability. Secondly because Turkey is so credit dependent that a weaker exchange rate immediately raises loan rates at home. In both accounts, unless TL reverts to pre-elections levels vs the dollar, a recession is cast in stone.
- At the current exchange rates, CPI could easily reach 20% before the end of the year, exerting new pressures on the exchanges and interest rates, as well as eroding disposable incomes.
- Turkish firms have net F/X debt of $220 bn at last count, of which I estimate, half is unhedged or balanced by export revenues.
- The destruction of company balance sheet values reflects on banks, which have difficulty collecting on loans and thus have to restrict new ones.
- Currency volatility makes it very difficult to manage inventory or quote forward import-export prices for Turkish manufacturers and tourism operators.
- Measures needed to stabilize the currency and attract foreign capital such as tighter monetary policy and fiscal austerity are both contractionary and deflationary. They reduce domestic spending and make it more difficult to pay back debt.
- This recession will be long and painful, because it entails repairing balance sheets, which as the experience of Great Financial Crisis demonstrated time consuming.
Sometimes it doesn’t take an advanced degree in economics to see that an economy is headed for a recession, common sense is enough. It is regrettable that Ankara and most of Turkey lacks that basic quality so commo to homo sapiens.
Originally published in http://www.paraanaliz.com/intelligence/analysis-late-save-economy/