emerging markets turkey

This Is Where The Next EM Crisis Will Start

"Fragile Five" and "an alternative version of monetary policy reality."

Listen, Turkey has got some problems.

On Friday we detailed the extent to which what looks like runaway inflation conspired with a conspiracy (and no, there are no typos there) to push 10Y yields up by a harrowing 30+bps and send the lira into (another) nosedive.

The Reza Zarrab case (a long-running saga that implicates Zarrab and a co-defendant in a truly ridiculous scheme to evade U.S. sanctions on Iran) looks like it’s going to end up ensnaring Erdogan. Everyone’s favorite Turkish autocrat has been fighting tooth and nail to kill the whole thing for years claiming, among other characteristically ridiculous things, that Preet Bharara was plotting against him in conjunction with Pennsylvania resident Fethullah Gulen. He’ll probably be able to pull some strings/crack some heads and avoid getting dragged too far into it officially, but the very fact that his name came up in court documents was enough to worry investors who are already concerned about Ankara’s deteriorating relationship with the West.


On the inflation issue, the CBRT is caught between a rock and hard place, because they need to combat this, but on the other side of the equation is Erdogan the rates strategist and self-described “enemy of interest rates.” His approach to the issue is… how should we put this?… “unorthodox”, to say the least. Here’s what he said early last month:

We still have not been able lower inflation and this is due to interest rates.

The fall in interest rates is unfortunately not at the level we would like. If we can’t achieve this, many troubles await us. We must solve this.

Got that? What needs to happen is that policy needs to be looser or else inflation will skyrocket. Here’s what Timothy Ash of BlueBay Asset Management told FT about that:

This just heaps more pressure on the CBRT to loosen prematurely. What Turkey needs is orthodoxy and a positive confidence shock — not an alternative version of monetary policy reality from Erdogan.

Well Timothy, it’s a good thing Erdogan can’t arrest you, because saying things like that is tantamount to treason in Turkey and probably all the “evidence” Erdogan would need to call Ash a “Gulenist puppet.”

On Monday, the poor CBRT tried to lean against the wind without getting themselves jailed, lowering the upper limit for FX use in reserve ops by 5 ppts to 55%. “In the recent period, the markets have witnessed unsound price formations that are inconsistent with economic fundamentals,” the bank said in a statement, adding that after “taking this development into account, with a view to supporting price stability and financial stability, the upper limit and the tranches for the FX maintenance facility within the reserve options mechanism have been revised.”

Apparently, this is going to withdraw something like 5.3b liras of liquidity from the market. That looks to have stanched the bleeding, but as you can see on the far-right, it’s already coming apart again:


Meanwhile, yields just keep rising:


For their part, the ETF crowd is getting nervous. The iShares MSCI Turkey ETF saw $8.3 million in outflows last week while the London-traded iShares MSCI Turkey UCITS ETF lost $19.4 million, the biggest outflow since March 2016.

And as if the news needed to get any worse, S&P just released a new version of their “Fragile Five” (the original in 2013 included Brazil, India, Indonesia, South Africa and Turkey). Well guess which country got the dubious honor of making both the old list and the new list? That’s right: Turkey. Here’s the new “Fragile Five”: Turkey, Argentina, Pakistan, Egypt, and Qatar.

“In our view, these sovereigns could be the most at risk when global financial conditions eventually tighten,” S&P notes, adding the following glowing assessment:

Turkey, a member of the original fragile five, is the only sovereign that is always among the most vulnerable, regardless of the variable chosen.

Again, if Erdogan could arrest S&P (the entire organization) you can bet he would.

And don’t forget that Turkey’s fate is intimately tied up with that of Qatar which, as noted above, is also on S&P’s new list.

So if you’re looking for where the EM crisis starts once DM central banks start normalizing in earnest, look no further than Turkey.

But don’t look too hard, because this is a man who will not hesitate to jail your ass just for breathing…





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