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The Astonishing Rebirth Of TL #TurkeyEconomy

The Astonishing Rebirth Of TL <a class="hashtagger" href="">#TurkeyEconomy</a>

Once relegated to the category of lepers along with Argentina peso, the Turkish Lira  staged a miraculous recovery since mid-August, gaining 30% vs the US dollar off historic lows.

Exports cite various reasons for the Phoenix-like rebound of the currency, but really, there is only one.  Hopes of better relations with US.

What do experts say?

Piotr Matys, emerging-market currency strategist at Rabobank said there were three reasons for the lira’s two-month rise:

The Turkish Central bank’s decision to hike interest rates by 650 basis points to 24 per cent in September;

Turkey’s finance minister’s new plan to rebalance the economy, which convinced investors the administration was making a genuine attempt to rebalance the economy and address persistently high inflation;

Easing of tensions between Turkey and the US after a detained pastor was allowed to return to the US — August’s sharp depreciation in the lira was mainly caused by a diplomatic spat between the two countries;

Luis Costa, a strategist at Citigroup, said markets were also responding positively to “prospects of further normalisation in the country’s current account.”

“Even though we worry about capital account flows, we believe the current trend on the repayment of FX corporate liability for the month of November may allow investors to focus less on the capital outflow story,” said Mr. Costa.

Both Messrs. Matys and Costa acknowledge that investors remain cautious towards the currency, wrote Financial Times on Tuesday.

Actually, there is only one reason

Both IMF and IIF concur that TL is at its fair value around 5.5 against the dollar; then why did it slump all the way 7.00?  Simple, investors  feared that the detention of American pastor Andrew Brunson and Ankara’s very public defiance of Iran sanctions would earn Turkey financial sanctions from US, crippling its beleaguered financial system.

Also read:  Will Karamollaoğlu Bring ‘Felicity’ to Turkish Politics? #TurkishElections2018

The recovery of TL dates back to a single day and a single event:  An obscure article in Wall Street Journal suggesting that a deal had been made to secure the release of Brunson.  It proved prescient.  Suddenly,  there were fewer reasons for the White House to punish Turkey.

Ankara may still sound defiant on Iran sanctions, but it and Turkey’s largest refiner Tupras already applied for waivers suggesting a search for a face-saving compromise. One does exist.  Tupras shifts some of its purchases to other markets, while Ankara promises not to allow anymore scandals like the rascally gold trader Mr. Reza Zarrab smuggling $12 bn of gold to Iran, thus hallowing out previous UN sanctions.

Additionally, as abhorrent as it is, markets believe—correctly—the heinous murder of dissident journalist Jamal Khashoggi in the premises of the Saudi consulate in Istanbul delivered the administration a tremendous source of leverage vis-à-vis Riyadh and DC.  In return for hashing up the investigation before it reaches crown prince Mohammed bin Salman, Turkey will be granted some financial aid and sanctions relief.

This, too, is true. While some sources claim Erdogan wants to dethrone the brash young prince, there is not a single mention of such a campaign in the pro-AKP press, which remains cordial, and in fact deferential towards Riyadh, the protector of Holly Relics.  One of President Erdogan’s top advisors, Mr. Yigit Bulut suggested in his recent Star daily article that the real culprits may be “imperialist moles” in the court which engineered the dastardly deed.

Banks borrow abroad

As investors began betting on a cease-fire between Turkey and US,  CDS premiums went down, allowing major Turkish banks like Akbank, Is Bankasi and Yapi Kredi to roll-over their maturing loans, postponing the much-feared currency crisis to a distant future.

Also read:  Turkey-China Relations: From “Strategic Cooperation” to “Strategic Partnership”?

Will it last?

Of course, TL strength is not permanent.  A few more  drips of “good news from” DC, such as waivers from Iran sanctions and/or the closure of the presumed Halkbank file could propel the currency higher, but November will probably witness the end of this astonishing come-back.

First, with Dollar Index at 16 month highs, and fund managers rapidly recognizing that QE-exit is nothing to be laughed at,  risk appetite is diminishing gradually but steadily. Fragile countries like  Turkey will bear the brunt of the slow-burn exodus from EM assets.

Secondly, Turkey has arguably the worst fundamentals among large Developing nations.  It will probably enter a recession in 4Q2018, as 2019 expected CPI is  still 15-17%.  While a rapidly shrinking current account deficit does lend some support to the currency, the monster in the ante-room is the $180 bn per annum F/X refinancing requirement, which is becoming onerous to roll-over as global financial conditions tighten.  It will not be surprising to see the Lira testing 6.00-6.20 levels against the US dollar by the time Santa Claus rolls into town.

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