Thursday’s rate decision in Turkey is the source of intense market interest for obvious reasons.
The lira’s meltdown last month was the culmination of a variety of negative catalysts including, of course, U.S. sanctions in connection with detained Pastor Andrew Brunson and generalized angst about the prospects for emerging markets in a strong dollar environment.
But if you’re looking to point fingers when it comes to the lira’s woes, President Recep Tayyip Erdogan deserves a large portion of the blame. Erdogan’s “unorthodox” economic views are legendary and just about the last thing you want if you’re a vulnerable emerging market, is an autocrat who views rate hikes as an act of treason.
We’ve written voluminously about this situation in these pages. Those who want the whole backstory are encouraged to check out Turkey In Crisis: A Narrative History And An Annotated Chart”, which documents the factors that conspired to push the country (and the currency) over the edge. Suffice to say when Erdogan consolidated power in a landmark June 24 election, it was abundantly clear that he intended to immediately commandeer monetary policy – he said as much in a May interview with Bloomberg television.
The market, however, was reluctant to price in the worst case scenario, despite the fact that the writing was on the wall. On July 9, Erdogan placed his son-in-law in charge of the economy. At the same time, he amended the central bank’s articles of association to give himself more sway. Two weeks later, the central bank surprised markets by eschewing an expected rate hike. That decision (to remain on hold) in the face of souring sentiment couldn’t have come at a worse time. When Washington ratcheted up the diplomatic pressure on Ankara, the lira buckled as traders finally accepted reality, which in this case means begrudgingly coming to terms with the fact that Erdogan is the de facto CBT governor.
When the lira collapsed in earnest last month, the central bank took a series of steps to arrest the slide and last week, CBT pledged to act after inflation data showed the picture worsening materially in August. Perhaps most worrisome were producer prices, which soared a truly harrowing 32%, suggesting the true pain from the lira collapse is not yet being passed on to consumers. That state of affairs isn’t sustainable, and it’s just a matter of time before consumer prices accelerate even more than they already have, which will in turn kill demand in a self-feeding economic doom loop. Here’s PPI in Turkey:
CBT has backed themselves into a corner here by pledging to act, just like they did in June. As noted in the linked post above, it’s not so much that they shouldn’t have promised to do something, rather, it’s that because it isn’t feasible to expect Erdogan to allow the kind of decisive hike to the policy rate that would help the central bank get a handle on things, they’re setting themselves up for failure. They implemented a “stealth hike” last month, by driving everyone into the overnight market where rates are 150bps higher than the policy rate, so who knows what they’re going to try this week. Barclays thinks CBT will hike all policy rates by 300bps and “revert all funding provision through its one-week repo rate”. Count me skeptical, although Goldman is on pretty much the same page with Barclays:
We expect that the TCMB will increase the one week repo rate by 350bp to +21.25% and the overnight lending rate to 22.75%. The TCMB has already communicated that it will take some form of action following the August CPI print. We think that the Bank’s reference to price stability suggest that the size of the adjustment may be linked to the increase in inflation expectations, which have risen materially since the last MPC meeting. We also think that the TCMB will return to funding through the one week repo rate following the rate hike and the effective rates will have risen by 200bp as a result.
So that’s the backdrop for Thursday’s CBT decision and while “consensus” sees the central bank delivering a 325bps hike to the one-week repo rate, some are skeptical. SocGen’s Phoenix Kalen, for instance, had this to offer on Tuesday:
At Thursday’s CBRT meeting, we look for roughly a 150bp hike in the CBRT’s effective funding rate to 20.75%, and a 300bp upward shift in the policy corridor, with the one-week repo rate restored as the main policy instrument. Although this amount of monetary tightening may disappoint market expectations and spark renewed TRY weakness, the decision would reflect the prioritization of Turkish authorities’ concerns regarding a rapidly decelerating economy. Our reading of the July MPC statement is that the CBRT’s worries about the magnitude and duration of Turkey’s growth deceleration may continue to exert more influence over decision-making than factors such as inflation expectations, pricing behaviour, and currency volatility.
If CBT does indeed disappoint, it would likely catalyze a fresh leg lower for already downtrodden EM currencies and equities. If they impress, expect the opposite.
Given all of the above, I’m not sure the news out of Ankara today is very comforting. On Thursday, Erdogan named himself chairman of Turkey’s sovereign wealth fund and dispatched with the entire management staff.
Guess who got a seat on the new board? Why, economic czar and presidential son-in-law Berat Albayrak, that’s who.
The country’s SWF has stakes in a number of Turkish companies as well as other state assets and as Bloomberg notes, it’s never been entirely clear what the fund’s mandate should be. “Some officials say the companies should be managed to add value in line with a traditional sovereign vehicle, while others argued that its assets could be deployed to subdue market turmoil [while still] others pushed for the assets to be securitized and for the state to borrow against them”, Bloomberg wrote on Wednesday.
“[It’s] good to see a clear out at the Sovereign Wealth Fund and those who failed to deliver have been ousted”, BlueBay’s Tim Ash said on Twitter, adding the following:
I see Yigit Bulut has been removed. Excellent to see Zafer Sonmez hired as the GM – ex-RBS banker, and ran the Malaysian SWF’s Turkish operations.
You can make of this what you will, but the bottom line here is that Erdogan has now put himself in charge of yet another important financial/economic institution.
The TVF story is an interesting one in its own right and there’s some nuance to be had for those interested in researching the fund’s brief history. But while I’m sure there are arguments to be made about why this particular shakeup was a positive development, I continue to think that anything which suggests Erdogan is moving to consolidate even more power in the executive presidency is a negative for Turkish assets because, frankly, he has not demonstrated anything that even approximates a willingness to act rationally when it comes to the economy in years.