Turkey Conflagration Melts Lira Lift Landscape

Turkey’s inflation jumped more than expected in July to 18.95% on a 25% annual surge in food prices, which account for about a quarter of the CPI basket.  The central bank last month upped the 2021 inflation forecast to 14.1% from 12.2%, before the wildfires in the coastal regions for random price pressure. Energy costs, up 21.5% from a year ago, may ease as the spread of the delta variant of Covid-19 damps demand. However, a dip in oil prices will not offset agricultural losses from the blazes hurting both inflation and the current account.

Preliminary estimates by the Agricultural Insurance Pool (TARSIM) showed damage totaling more than USD 10 million.  Sheep, goats, poultry, greenhouses, and crops have all been decimated. The fires forced evacuations and burned buildings in some of the country’s most popular tourism destinations, including Bodrum and Marmaris. In 2019, tourism accounted for 9.4% of jobs countrywide and contributed 11.3% of GDP, according to the World Travel and Tourism Council.  Last year tourism industry revenues fell to about USD 12 billion from more than USD 34.5 billion a year earlier, according to the ministry of culture and tourism. 

Turkey’s perennial current account deficit, 4%+ of GPD, will be hit by reduced foreign tourist arrivals as the government was expecting some USD 20 billion in revenue from the sector this year. Through June, the total was only USD 5.5 billion. At the same time, the trade deficit is worse. Headline numbers have exports up 47% y/y in June and imports up 38.7%, for respective USD amounts of USD 19.7 and US 22.5 for a $3 billion gap.

Despite a good showing in July when it surged 3% against the USD, the lira is down nearly 12% so far this year and foreign holdings of local government bills and bonds stand at a record low. Investors lost confidence as the central bank governor was replaced and reserves dwindled “well below the recommended adequacy range,” according to the IMF in its 2021 Article IV. The Fund’s SDR injection adding more than 10% of reserves will briefly buoy the TRY, but exchange rate fundamentals argue against re-engagement.  

Despite inflation, the currency, and external accounts, Turkish corporates sold more than USD 4 billion in USD and EUR bonds the first half of the year. While Fitch Ratings recently warned that foreign currencies account for an average 70% of debt but only 46% of revenue for companies they rate from Turkey, investors bought well-known blue-chip exporters in their global search for yield.  However, the same did not apply to Turkish stocks with the market down 17% so far this year in USD terms on the MSCI EM Index, the third worst performer after Colombia and Peru.

Turkey faces geopolitical challenges with another surge in refugees. Already host to 3.6 million displaced Syrians, reports estimate that thousands of Afghan refugees are entering the country. Relations with the US and EU are strained over dozens of issues including the NATO member’s purchase of Russian defense equipment and policy differences in Syria, Libya, and the Mediterranean.  Moscow warming was highlighted again last week when the trade minister launched an Intergovernmental Joint Economic Commission while pledging to boost bilateral trade to USD 100 billion. 

The next election must be called by June 2023, the Republic’s centenary. Rising inflation, a sinking currency, and high unemployment – in addition to President Erdogan’s documented lack of respect for democracy and rule of law – have his popular approval under 30%, the lowest since becoming Prime Minister in 2002.  Any spike in his popularity will likely move the date up, but for now major opposition parties have vowed to run together as the National Alliance to defeat him, and have staked out the refugee issue as first in a series of economic and foreign policy contrasts.

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