Can the Fed save us again?
Last year ended better than feared by some measures, markets have been constructive on Turkey so far this year and now the Fed, recoiling from recent market turbulence, has signaled that it is probably finished with rate hikes for now, and moreover, that the balance sheet runoff may end sooner than envisaged.
So far though, the realities on this side of the pond are very much in line with what we’ve been conjecturing. Economic activity is contracting, which looks like anything but a “soft landing” and the credit crunch is continuing with overall credit growth still in negative territory. Meanwhile, the government appears to have entirely shelved plans to introduce a comprehensive corporate debt restructuring framework, with the BRSA having given a clean bill of health to the banking sector, and the government itself trying to impede, rather than facilitate, the resolution of ongoing bankruptcy protection filings (‘concordats’).
More broadly, Ankara’s response to the current situation has been to apply a host of unconventional measures to boost growth, including some heavy-handed interventions, while keeping monetary and fiscal policies relatively restrained. But this approach is unlikely to prove sustainable and/or succeed in “circuit-breaking” the “doom loop” that we’ve long been talking about – a vicious cycle of economic contraction, weaker balance sheets and dearth of credit.
With growth in the doldrums, we think traditional policy easing, under political pressure, will be inevitable at some point in the not-so-distant future, most likely before the local elections of end-March, leading to another episode of significant market volatility.
But then what? Ankara is most vehemently opposed to the idea, as Minister Albayrak once more furiously underscored in a recent statement, but we think initiating program negotiations with the IMF sometime in the next several months is still the rational, and therefore most likely outcome. Should this indeed turn out to be the case, markets would no doubt rejoice, capital inflows would resume, and it would be possible to imagine a rather constructive macro scenario, at least in the near-term. After contracting through the first half, the economy would rebound sharply in the second half, but still contract for the year as a whole, while inflation would decelerate to some 15%-16% by yearend, and single digits soon after.
Needless to say, it is possible to envisage at least two alternative scenarios. One in which we may be proven wrong, if you will, “in a benign way” so that Turkey manages to muddle through yet another year after all. Admittedly, the probability of this scenario has somewhat increased after the latest Fed communication, but it is still very low in our view, and in any case, the endgame in this scenario would still remain hugely uncertain.
In an alternative scenario, we would be proven wrong the “malign way”, as Turkey embarks on a truly experimental journey with dire economic and social consequences.
Now read on...
Register to sample a report