1/x
🇹🇷 Turkey is having a tough year with Covid-19 leaving less room for policy mistakes.
Here's a quick X-ray in context.
1) Growth: Less hit on the economy; 2Q20 was better than major emerging & developed peers.
But % growth is usually not a problem for Turkey.
🇹🇷 Turkey is having a tough year with Covid-19 leaving less room for policy mistakes.
Here's a quick X-ray in context.
1) Growth: Less hit on the economy; 2Q20 was better than major emerging & developed peers.
But % growth is usually not a problem for Turkey.
2/x
Problem is usually how Turkey grows. Is it productivity gains, value added, capital investments; fat or muscle?
Well, a long discussion. But the big push for credit (ie. sugar rush) that accelerated credit growth momentum up to 50-80% levels definitely helped.
Problem is usually how Turkey grows. Is it productivity gains, value added, capital investments; fat or muscle?
Well, a long discussion. But the big push for credit (ie. sugar rush) that accelerated credit growth momentum up to 50-80% levels definitely helped.
3/x
But sugar rush is never good. The credit push once again led to an increase (or prevented a decline) in imports - will elaborate shortly.
2) Government finances: The momentum is definitely no good, but remains as one of stronger aspects of the Turkish economy +++
But sugar rush is never good. The credit push once again led to an increase (or prevented a decline) in imports - will elaborate shortly.
2) Government finances: The momentum is definitely no good, but remains as one of stronger aspects of the Turkish economy +++
4/x
One hand, budget deficit is skyrocketing especially assuming IMF definition (ie. removing some one-off rev's).
Another hand, debt/GDP still lower than majority of emerging peers, reaching only to 40% even assuming a 5% deficit in 20. Many EM peers will see a 5-15% deficit.
One hand, budget deficit is skyrocketing especially assuming IMF definition (ie. removing some one-off rev's).
Another hand, debt/GDP still lower than majority of emerging peers, reaching only to 40% even assuming a 5% deficit in 20. Many EM peers will see a 5-15% deficit.
5/x
In context, government spending on interest as % of revenues still lower than peers despite significantly higher interest Turkey pays.
In context, government spending on interest as % of revenues still lower than peers despite significantly higher interest Turkey pays.
6/x
3) Currency: This is where trouble starts.
Four major sources of demand for Dollars in Turkey this year led to the CB losing some USD 60-65bn FX reserves, net of swaps, so far this year.
3) Currency: This is where trouble starts.
Four major sources of demand for Dollars in Turkey this year led to the CB losing some USD 60-65bn FX reserves, net of swaps, so far this year.
7/x
This demand for FX was driven primarily by
1. Demand for imports: Turks buying raw materials, importing energy, renewing mobile phones and driving German cars.
Triggered by a significant credit expansion, trade deficit began to increase already during early 2020.
This demand for FX was driven primarily by
1. Demand for imports: Turks buying raw materials, importing energy, renewing mobile phones and driving German cars.
Triggered by a significant credit expansion, trade deficit began to increase already during early 2020.
8/x
But lack of tourism revenues for a summer tourism country such as Turkey made things much, much worse.
Turkey has so far lost out on some USD 19bn of FX inflows from travel + transport due to Covid-19.
Full year, the unrealized FX revs might reach USD 28bn, combined T&T.
But lack of tourism revenues for a summer tourism country such as Turkey made things much, much worse.
Turkey has so far lost out on some USD 19bn of FX inflows from travel + transport due to Covid-19.
Full year, the unrealized FX revs might reach USD 28bn, combined T&T.
9/x
The outcome is that current account deficit will be much higher than it'd otherwise be: partially due to aggressive credit expansion (could've been controlled), partially on tourism (simply unlucky).
YtD current account deficit implied some USD 20-22bn demand for Dollars.
The outcome is that current account deficit will be much higher than it'd otherwise be: partially due to aggressive credit expansion (could've been controlled), partially on tourism (simply unlucky).
YtD current account deficit implied some USD 20-22bn demand for Dollars.
10/x
2. Foreign repatriation: another large source of demand for Dollars, foreigners pulled USD 13.5bn out of the market so far this year.
Foreign holdings in Turkish assets now down from ~ USD 150bn in 2013 to only USD 27bn. Foreign investors now practically out.
2. Foreign repatriation: another large source of demand for Dollars, foreigners pulled USD 13.5bn out of the market so far this year.
Foreign holdings in Turkish assets now down from ~ USD 150bn in 2013 to only USD 27bn. Foreign investors now practically out.
11/x
3. Debt repayments: Total ST debt been ~USD 170bn . Even though lots of details, one can assume a high rollover of 80-90%.
USD 14bn/month to rollover at a high rate, debt repayments would make some USD 1.5-2bn a month, or USD 12-14bn demand for Dollars ytd.
3. Debt repayments: Total ST debt been ~USD 170bn . Even though lots of details, one can assume a high rollover of 80-90%.
USD 14bn/month to rollover at a high rate, debt repayments would make some USD 1.5-2bn a month, or USD 12-14bn demand for Dollars ytd.
12/x
4. Finally, locals... : Locals rushed to gold, adding USD 21bn to their bank deposits. This demand was probably the most unexpected and strongest of all.
As a result, Lira is the second weakest EM currency, losing 20.5% vs. USD so far this year.
4. Finally, locals... : Locals rushed to gold, adding USD 21bn to their bank deposits. This demand was probably the most unexpected and strongest of all.
As a result, Lira is the second weakest EM currency, losing 20.5% vs. USD so far this year.
13/x
Reversing this trend will not be easy in an environment where market participants show zero tolerance to policy mistakes due to Covid-19 stress (EM-context) and given lack of tourism $$$ (Turkish context).
Reversing this trend will not be easy in an environment where market participants show zero tolerance to policy mistakes due to Covid-19 stress (EM-context) and given lack of tourism $$$ (Turkish context).
14/14
Going forward,
1) Imports/CA: less imports on weaker Lira and increasing taxes
2) Foreign outflows: likely ease bcs foreigners have simply no money left
3) Debt repayments: continue, but foreseeable & rolling over
4) Local demand: KEY to determine what happens to Lira
Going forward,
1) Imports/CA: less imports on weaker Lira and increasing taxes
2) Foreign outflows: likely ease bcs foreigners have simply no money left
3) Debt repayments: continue, but foreseeable & rolling over
4) Local demand: KEY to determine what happens to Lira
