Turkey – Emerging Currency Wars

[Y_Participant 4591]

In the period between 1 Sep 2016 and 16 Dec 2016, the Turkish Lira lost 15% against the resurgent US dollar and 10% against the Euro. The trend is unmistakable and very similar to other nations now under currency stress combined with weak economic policies. This appears to be an emerging currency war exacerbated by the Turkish nationalistic government that seems unlikely to be managed.

In 2015 Jim Rickards returned from Istanbul, Turkey to gather market intelligence on the world’s eighth-largest emerging market. Istanbul is an emerging financial center not just for Turkey but also for a broad region including Eastern Europe, Central Asia and the Middle East. Although Turkey is classified as an emerging market (EM), it is closely aligned with major developed countries as a longstanding member of NATO. As such, it is subject to the interactions between developed and emerging markets, including hot money capital flows, currency wars and the struggles with interest rate policy and inflation.

A disastrous period of hyperinflation from 1995-2005 stopped by a government currency reform saw a fairly stable lira for the past 10 years, and inflation has been mild. Due to refinancing of investor capital and the US stock market crash in 2008, there was sufficient confidence in the Lira for growth and investment opportunities. Turkey in 2015 had a large, well-educated population, good infrastructure, strong exports and tourism and is strategically located to act as a conduit for energy

The bad news is that the Central Bank – TMSF was (and still is) under pressure from politicians and Turkish financial markets to cut interest rates and devalue the Turkish currency to artificially boost expansion of exports and tourism. What results from these currency wars is not growth, but inflation, as recent experiences in Brazil and Australia has demonstrated.

The Turkish individual savings rate is low, while consumers continue to spend freely using credit cards. Turks keep money in banks for deposit rates of 8% or higher, rather than in the markets – this restricts capital formation by investment in debt yielding instruments such as treasuries and stocks.

Real estate, both high-end residential and commercial and being fuelled by cheap bank credit, is coming from wealthy international buyers, such as China, Russia, Argentina, Venezuela, Syria and Egypt.

The result is that Turks are underinvesting in national growth, and overconsuming – fuelled by easy personal bank credit – while the government demands debt expansion to combat budget deficit policies that are in direct conflict with this current status quo.

It hardly needs noting that Turkey is in a bad neighbourhood, sharing long borders with Syria, Iraq, Iran and the Caucasus. Its southern border is in crisis, with Syrian refugees fleeing the Islamic State and civil war.

In late 2015 the economic landscape changed. With investors fleeing and creditors knocking, the rapidly deteriorating political situation has left the Lira reeling in the international money markets. Under these conditions the local banks and populace have invested in US dollars and the Euro as safety nets.

A recent massive devaluation of the lira to balance the flow of Western money out of the country amid a resurgent US dollar has created a vacuum for the upcoming surge in inflation. The only choice left for the central bank is to try to stabilise the Lira to prevent runaway inflation, bank runs or a banking crisis. Normally, any other country would find itself in a dilemma: how to lower rates as per the president’s demands to stimulate investment and the economy, without killing the economy… but not Recep Tayyip Erdoğan

He immediately began his war on foreign currency as the root cause, saying anyone who has US $1 bills is a traitor and insisting the population convert their foreign currency to Turkish lira out of patriotism.

And no, he wasn’t joking, Turkey’s main stock exchange, Borsa Istanbul, became the first institution to convert all of its cash assets into the Turkish Lira a few hours after this speech. Borsa Istanbul said in a written statement on Dec. 2 that it would convert all of its cash assets into lira and keep them in lira accounts.

Worries over Erdogan’s influence grew after Prime Minister Binali Yildirim said the government would bring a bill to parliament which proposes to change the Constitution and give greater powers to the president.

Considering Erdogan’s track record, it is only a matter of time before he appoints himself central bank head too, at which point the Turkish Lira and the Venezuela Bolivar will begin a race to see which one can reach a value of 0 faster.

Turkey is taking steps to allow commerce with China, Russia and Iran to be conducted in local currencies, as the government’s latest efforts to shore up the tumbling lira.

Turkey is a typical case of a large emerging market with good long-run potential but plenty of short-run political and economic problems. How and what policies will save the Lira is yet to be seen.

http://www.zerohedge.com/news/2016-12-02/erdogan-demands-turks-exchange-their-dollars-gold-lira
http://www.cnbc.com/2015/11/27/russia-and-turkey-whos-winning-the-currency-war.html
http://www.cnbc.com/2015/11/27/russia-and-turkey-whos-winning-the-currency-war.html
https://dailyreckoning.com/turkeys-long-term-potential-and-short-term-problems/

[Y_Participant 4591]

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Great analogy – love it

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