Strategists say Turkey’s uncertainty is hardly attractive to investors

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Turkish President Recep Tayyip Erdogan (C) gestured with Turkish Lira banknotes when he gave a speech on stage during the 2019 Annual Evaluation Conference. Ankara, January 16, 2020.


Ozan Ozkural, managing partner of Tanto Capital Partners, a boutique investment company, said that the unpredictability of Turkey’s fiscal and monetary policies means that investors should stay away until normal.

The Turkish lira plunged this week to a previously unfathomable historical low as the country’s central bank, TCMB, continued to cut interest rates despite the double-digit inflation rate.

The inflation rate in this country of approximately 85 million people is close to 20%, which means that the prices of basic commodities have soared while wages in the local currency have fallen sharply.

In an interview with CNBC’s “Squawk Box Europe” on Wednesday, Ozkullar said that the problem is not only the reverse easing of monetary policy as central banks around the world hope to tighten monetary policy, but also the way in which it is implemented.

“Investors, if you want, our favorite is unpredictable monetary and fiscal policies, so Turkish assets and Turkish risks become very difficult to price,” Ozkural said.

“In this case, I can’t imagine that any investors will enter the country in the short term before this situation changes.”

Turkish President Recep Tayyip Erdogan defended his central bank’s continued easing of monetary policy, a method he promoted to “eliminate this scourge of interest rates on people’s backs.”

Since September, the central bank has cut the main policy rate by 300 basis points, and as investors fled Turkish assets, the depreciated currency has fallen into free fall.

“Turkey is a big country, it is very important in geostrategy, market dynamics, demographic structure is good for it, and it is extremely resilient to shocks,” Ozkulal said, adding that the Turkish economy has proven to be good in the past. Response to the crisis.

But he said that there are too many unknowns about investment in Turkish assets, even for a longer period of time.

“In the current climate, unless we turn to a fundamentally credible reformist position-whether in this administration or when the next election takes place-it is currently difficult to make long-term investments in the country,” he Say.

“But in the medium and long term, the importance and importance of Turkey to investors has not disappeared.”

“Fundamental changes” in TCMB’s functions

The lira has been declining for many years, from around 3.5 to the US dollar in mid-2017, to an unimaginable 13.44 before Tuesday. Geopolitical tensions, huge current account deficits, increasing debt and shrinking currency reserves, and Erdogan’s firm opposition to raising interest rates have exacerbated this decline.

But in a research report on Tuesday, Goldman Sachs emphasized that “the reasons for the current sell-off are different from the past.”

“The current account deficit is the main weakness in 2020, which has been reduced by more than half compared to last year. We have observed a limited acceleration in loan growth, with a slight rebound in dollarization recently,” said Goldman Sachs partner Murat Unur and economist Clemens Grafe. .

Turkish President Tayyip Erdogan speaks during a meeting with business people in Istanbul, Turkey, on January 15, 2021.

Presidential Press Office | Via Reuters

They also pointed out that prior to this, there have been no significant changes in portfolio flows, derivatives exposure and debt rollover rates.

“Therefore, we believe that the selling is mainly due to the impact of interest rate cuts on local expectations and the demand for Turkish lira.”

Unur and Grafe stated that the recent rate cuts represent a “fundamental change in TCMB’s response function.”

“Although it can be said that TCMB was too dovish in the past — for example, it cut interest rates sharply in the first half of 2020 and postponed rate hikes in the second half of 2020 — but it did not completely violate the requirements of domestic output and inflation conditions, especially at the time. When the lira is under tremendous pressure and global financial conditions are tightening, it’s like this,” they said.

“Different TCMB response functions and the increased importance of expectations in driving asset prices increase the difficulty of forecasting in the coming months.”

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