Turkey’s Pesky Pump-Priming Primer
Turkish shares briefly roared into the new year to leave behind 2019’s lagging single-digit gain versus the MSCI benchmark, as Finance Minister and Presidential son-in-law Albayrak unveiled another bank-credit fueled plan to restart 5% growth in contrast with last year’s near recession. The central bank with half a dozen rate cuts the past six months has supported the thrust, with the lira firming for a time at a “competitive” level below 6/dollar after previous crash fears, officials assert. Renewed monetary relaxation has resulted in negative real rates, with inflation stubbornly in low double digits on food price pressure. State and private banks were ordered to reclassify loans so that the NPL ratio is above 5%, but they are expected to again open the spigots as the government debates a central bad asset disposal arm. As a contingent fiscal liability the move along with accounting for public-private infrastructure partnerships could reveal a sizable deficit at odds with traditional balance. High-profile construction projects remain saddled with high debt, as President Erdogan vows completion through local funding and new Gulf and Asian sources. His team pledges better management with industry and operating overhauls at the core of the near-term structural reform agenda, without relinquishing close business ally control.
Along with loose monetary policy, the current account deficit resumed in January after a rare surplus was registered last year on import squeeze. Agriculture and textile exports are at the mercy of world market values and auto-assembly has suffered with Europe-wide downturn. Foreign portfolio outflows as a trend have slowly reversed, but direct investment as a perennial weak spot is meager. The amount of usable foreign reserves is a mystery with resort to interbank and stock exchange currency swaps, while the offshore market is banned and bank deposit dollarization has barely budged. At most tens of billions of dollars is available, as private sector debt rollover is in the $100 billion range in 2020, with the global liquidity picture potentially tightening at the margin. Unlike 20 years ago the government insists an IMF program is not under consideration, as it turns to China and regional neighbors for potential infusions.
Politics is a major driver of the economic strategy repeat after the ruling AKP party lost Istanbul and other big cities to opponents now in charge of over half the country’s output. The former prime minister and his deputy defected from the group to start a new competitor, and a succession race has broken out among the incumbent’s backers. President Erdogan’s popularity was briefly boosted with his takeover of Kurdish-run Syria as US President Trump pulled troops back, although relations between the two remain volatile, with the latter regularly threatening trade sanctions and tariff hikes. Strains with Europe have multiplied over Cyprus, Syrian refugees and Libya, where Ankara voted to intervene militarily on behalf of the Tripoli regime which has lost central bank and oil field control. Its main challenger with ISIS knocked out of the contest is General Shifter, who lived in exile in the US, getting arms from Russia, Saudi Arabia and the UAE. The fighting has spawned massive internal displacement alongside the African onward trek to Europe, with EU assistance not primed for recycling.