Why Turkey is headed for Stagflation?

-  The views written in this post are strictly mine and doesn’t reflect the views of the institution I work for

After Turkey’s Central Bank (TCB) governor had tried to calm down the markets on Tuesday after lira traded record lows against US dollar and Euro, he unintentionally made the situation worse. Turkish lira slumped even more probably making the day “Black Tuesday” for Turkish market.

Başçı openly challenged the 4-trillion-a-day market openly while resisting an interest rate hike which left everyone scratching their heads. Turkish lira almost lost 763 basis points in 2 days despite his forecast of USD/TRY at 1,92 year’s end.

Turkey has a large trade and current account deficit. Most of the imports are comprised of energy commodities like oil or natural gas. Lira losing value makes these commodities more expensive for the domestic consumer. Oil prices rising due to Syrian conflict is not helping Turkey either.

It is obvious by now that TCB has shifted its focus to growth from inflation. Weak Turkish lira will force inflation to go higher due to large imports of Turkey. Central Bank should be hoping by resisting a rate hike which will keep the consumer credit rates at record low levels, the growth won’t be tapered.

Second, high energy prices will be a hurdle for growth as well as causing domestic prices to rise. Analyst expected Turkey to grow around 3 – 3.5% this year, a little higher compared to unimpressive 2012 growth rate of 2.2%.

The credit-pumped companies and foreign capital addicted banks will be shaken by the weak lira which will be difficult for them to grow, invest and hire employees.

Moreover the Syria situation gets more complicated for Turkey. As the government shows its willingness to interfere in Syria, it will be likely be an active player which makes things even more complicated for Turkey. If the conflict turns really sour for the region and Western powers unable to oust Esad quickly, Turkey will be a close target for the Esad regime, Islamist fundamentalists groups and likes of Hizbullah and Iran.

These economic and political risks are likely to cap the hiring in Turkey which then can cause the unemployment rate to rise.

As a result Turkey can be faced with high inflation and a high unemployment rate.

Rising oil prices can postpone Fed tapering

-This is the translation of  WSJ blog post that appeared on 8/28/2013

While Western intervention to Syria is now almost certain, rising oil prices due to the conflict can make Fed to postpone its decision to lower monthly 85 billion worth of asset purchases.

Is Investment ICM manager Şant Manukyan warns if the oil prices moves from 110 dollars a barrel to 140 dollars, it can be a hurdle for global growth. “This can leave Fed’s tapering out of market focus”, said Manukyan to Wall Street Journal.

During the era where Arab Spring spread to Libya and Muammer Gaddafi being ousted the Brent price has climbed from 80 dollars to 126 in just 6 months. Economist Nouriel Roubini named the rising oil prices as the biggest threat to vulnerable global growth.

Brent rising to 115 dollars, the highest levels since February and crude climbing to 110, the highest in 2 years will specially cripple energy important countries. Rising oil prices coupled with the outflow from emerging markets can derail the global recovery.

Fed already announced that it will go with easy monetary policy until US unemployment rate decreases to 6.5%. Decrease in unemployment depends on economic growth so Fed will likely to consider cutting asset purchase at a later date which will keep also help dollar stay cheap and commodity prices high.

How much Turkey’s central bank care for lira?

- This is the English translation of the original Turkish blog post for The Wall Street Journal published on 8/23/2013 (Prices have been modified with more recent ones)

After the US dollar rockets to above 2,2 Turkish liras, there is still no sign of Turkey’s central bank returning to orthodox policies which makes me believe central bank is more worried about growth and current account than inflation and lira.

Standard Bank’s Tim Ash says “… if the CBRT really cares about the lira. And there is the problem, we are not sure if the CBRT really cares that much about the lira, and inflation, but is more concerned about growth” in a research note.

Now it is obvious that TCB’s main strategy to sell forex to cool down the lira is ineffective. However Governor Erdem Basci insists on using tools such as Reserve Option Coefficient and FX auctions. So it can be concurred that the Central Bank is happy with its policies and where the Turkish lira trades at.

Once we accept Central Bank is happy with the value of Turkish lira, then it is not hard to understand main concern of the bank is to fund gigantic CAD as well as not taking the foot of the growth pedal. Moreover TCB calculated that the increased energy bill in liras – Turkey imports more than 75 percent of the oil processed in refineries – won’t be a problem. The dragging effect of high energy bill on economy will be countered with the rise in exports. 

Marc Faber and Jim Rogers expect a bear market for Turkey

-Original article appeared on 8/27/2013 on WSJ in Turkish

Two of the celebrated and famous investors are expecting a bear market for Turkey. Marc Faber and Jim Rogers are also foreseeing a short term sell off in emerging markets.

One of the most prominent commodity investors in the history who also foresaw the China led rise in emerging markets, Jim Rogers was pretty on the down side for the Turkey.

“We are all going to suffer. Countries with trade deficits will be very suspect since the markets will worry about how they are going to finance the deficits” told Rogers to Wall Street Journal in an interview done over the email.

According to Turkish Statistical Institute Turkey’s trade deficit has exploded to 24 billion USD in last 10 years, increasing 5.5 fold.

The infamous Marc Faber who is also known as Dr.Doom as the publisher of “Gloom, Boom and Doom” report, was also very bearish:

“I am very bearish because it has experienced a colossal property bubble” said Faber to The Wall Street Journal.

As the booming housing market is visible as new skyscrapers reshapes the Istanbul’s skyline, house prices has increased 42 percent according to the Central Bank of Turkey. According to Reidin, an emerging markets real estate research firm, housing prices has gained 50 percent since 2009 dip and more than doubled since 2001.

Both investment gurus thing there will be an outflow from emerging markets which might not last long.

“Emerging markets may begin to outperform the US, which is now rather vulnerable” says Mr. Faber who also adds, “(Jitters) Has little to do with tapering but liquidity is tightening and there was over consumption (trade and current account deficits) in emerging markets.”

Jim Rogers also warns about the rocky markets in couple of years:

“There are going to be market problems in many markets in the next couple of years.”

5 reasons why foreign investors are worried about Turkey

 - This is the translation of the article that appeared on WSJ.com.tr on 8/22/2013

1) Reel rates of Turkey’s 10 year yields are par with US: Turkey’s 10 year government bond yield is trading around 9.85%. The inflation rate was announced as 8.88% in July. So the real return of the Turkey’s bonds are around 97 basis points.

At the same time 10 Year US Treasury yields are at 2.94% and the latest July inflation has risen by 20 basis points from previous month to 2 percent in July. That puts the real return of US 10 year treasury’ at 94 basis points.

And adding the fact that you can cash out US treasuries anywhere in the world without running into a liquidity problem, the yields on Turkish bonds are not attractive.

2) Currency risk: The recent sell of Turkish lira makes investing in Turkish assets quite risky. Turkish lira has slumped 3.3 percent in the month of August and lost almost 12 percent against US Dollar since January. The situation was even uglier against Euro which lira lost over 14 percent this year.

This quick drop in Turkish lira deepens the loss sustained by foreign investors  in Istanbul’s stock exchange which had lost 12 percent this year. Stock market is now in bear territory losing 26 percent from record levels seen in May.

For foreign speculators holding assets in Turkish lira erases good chunk of the any profits they might have and worsens the damage they sustain.

3) Regional political risks: As Turkey’s southern neighbour Syria is dwelling with ever growing internal conflict and the Egypt situation getting more messy and the latest car bomb explosions in Hizbullah controlled areas of Lebanon, the situation in Middle East has become quite complicated.

Moreover, Turkish government is very vocal and has been involved in all the conflicts in the region which makes the country the most exposed to the dangers. Prime Minister Recep Tayyip Erdogan’s latest remarks blaming Israel for the military takeover in Egpyt is not helping Turkey either.

4) Unclear monetary policies of Turkey’s Central Bank: TCB said it won’t be holding forex auctions on days announced as extraordinary. However this week the bank announced that until further notice everyday will be extraordinary and it will sell at least 100 million worth of FX. Such sharp changes as well as insisting on orthodox monetary policy of not altering interest rate confuses investors.

Although TCB has increased the lending rate by 50 basis points to 7,75%, it stills refuses to use conventional strategy to increase interest rate. In today’s piece on WSJ by Emre Peker and Kerim Karakaya, a poll shows almost all the economist think TCB should return to conventional policies but economists also say TCB won’t.

The confusing and ever changing policies of the central bank, turn off  investors.

5) The wind has changed for Emerging Markets: Even before the chatter about Fed’s tapering began, emerging markets have already started to lose steam. China’s sluggish growth rate of 7.5 percent in the 2^nd and India’s terrible growth rate of 4.8 percent in the 1^st quarter summarizes the broader story with these countries. Turkey who benefited most from the capital flowing to EMs will likely to get hurt most when the outflow fastens.