Recep Tayyip Erdogan spent quite a bit of time on Friday imploring Turkish citizens to exchange their dollars, euros and gold for lira as part of what the President has variously pitched as a kind of patriotic duty to defend the country’s economy from “economic hitmen”.
If you’re late to this story, suffice to say he’s been saying that for weeks, but the calls got louder on Friday as the currency crisis accelerated, pushing the lira beyond 6.80 at one point as liquidity dried up.
(Panic mode for the lira)
For those who missed it, here is a clip from one of Erdogan’s Friday rallies:
Needless to say, that didn’t inspire a lot of confidence. After all, if someone has to beg you to trade in your dollars and euros and gold for a currency that’s in free fall, you’re likely to do just the opposite.
Sure enough, Bloomberg reports that Turkish banks will be holding emergency meetings on Saturday with the banking regulator after struggling to keep up with demand for foreign currencies on Friday. “At two banks, customers couldn’t receive foreign currency because the branches were waiting for replenishment from headquarters [and] one bank couldn’t meet a request to withdraw $5,000”, Bloomberg says, adding that according to one account, at least some banks were ordering cash “from abroad” in a desperate attempt to serve clients.
Not to put too fine a point on it, but a couple of more days like that and Erdogan may well resort to capital controls. We’ve variously argued that he will be loath to allow the central bank to hike rates enough to stanch the bleeding (at this point, they would need a truly draconian hike to restore confidence). At the same Friday rally shown above, Erdogan railed against the “interest rate lobby”, another sign that he’s nowhere close to conceding that his version of economics is simply does note reflect reality.
“We think you need 300 to 400 basis points hike as a first step to stabilize the lira and you also need tighter fiscal policy”, Geoffrey Dennis, head of global emerging market equity strategy at UBS told Bloomberg TV on Friday. Surely Geoffrey knows this, but I feel like I have to say it anyway: “300 to 400” bps would be laughably inadequate to address this scenario. They need something on the order of a 1,500 bps hike to make a dent.
It also seems highly unlikely that Erdogan would be willing to accept the terms of an IMF program – especially not within two months of consolidating power and under threat of U.S. sanctions. The political price would be too high and his reputation would be on the line. There’s more on that in “‘This Is Not Going To End Well’: Turkey Isn’t EM’s Bellwether, But Brace For Impact Nonetheless“.
Meanwhile, analysts are piling on. On Friday afternoon, Wells Fargo suggested that the lira is likely heading to 8.00. Here are a couple of excerpts from the bank’s rather dire assessment:
We note, for example, that the government set an economic growth target of less than 4% on Thursday this week, down from a previous target of 5.5%. Moreover, given recent events, the policy choices facing Turkish authorities are very challenging. In the absence of sizable Turkish central bank rate increases, inflation will likely continue to accelerate and the Turkish lira will fall further. Of course, any sizable rate increases—leading to a rise in real interest rates—that were able to stem the rise of inflation and a drop in the lira would almost certainly hurt the economy, a development that would also harm investor sentiment and complicate the government’s budget dynamics. The bottom line is that we are not certain how decisively the Turkish government is inclined to respond to the current crisis, or indeed if it faces any good choices that would stabilize the economy and currency. Overall, we think it will be difficult—in a floating exchange rate regime—to avoid a further substantial decline in the lira, and we target a USD/TRY exchange rate of TRY8.00 in 18 months. In the current circumstances, we would also not rule out the risk of Turkey imposing capital control to stabilize the currency. In that scenario, however, we would expect foreign investment inflows to slow rapidly and dramatically, clearly an issue given Turkey’s current account deficit and its financing needs, as well as the government’s financing needs. Even if the imposition of capital controls temporarily stabilized Turkey’s currency, it is not, in our opinion, a panacea for the country’s economic woes.
Credit Agricole echoed those sentiments, noting that rate hikes likely won’t be sufficient at this point given the lack of credibility. “We do not see the pressure as abating anytime soon given President Erdogan’s stance, as he calls the current situation ‘economic warfare’”, the bank wrote in a Friday note.
“We think the volatility across some major emerging markets, including Turkey and Venezuela, is unlikely to pass quickly”, Barclays chimed in, adding that “the timing of this diplomatic impasse [between the U.S. and Turkey] is unfortunate, coming amid high inflation and the absence of a response from the central bank.”
Notably, Turkey is now seen as more likely to default than Greece:
(A disconcerting crossing of the streams)
Trump attorney Jay Sekulow (who talked to Fox News about Brunson last week), said in a radio interview late Friday that he believes Washington and Ankara are closing in on a “resolution” when it comes to freeing the pastor. That’s likely just talk.
Whatever the case, something material needs to happen over the weekend to buoy sentiment. If not, next week will be dangerous.