​Cosmic Strategist: Rate hike or capital controls?

TURKEY - In Brief 07 May 2020 by Atilla Yesilada

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These are personal views of the Cosmic Strategist as channeled by Atilla Yesilada, and not the house view.His Cosmicness is extremely frightened by the slow-motion currency attack that is in progress, maintaining it shall not end by itself “at some point in the near future”. To the contrary, self-fulfilling prophecies of a currency crisis are likely to be set in motion soon, accelerating the rate of depreciation of the TL.Turkey’s trade deficit and foreign debt payment schedule is not daunting, but promise additional outflows. According to Bloomberg survey (link here), Turkey ranks at or near the bottom of the EM countries investors are likely to visit. The Cosmic Man believes the only permanent solution to currency weakness and its ill-effects on the economy is a stand-by program with IMF, but doesn’t think President Erdogan is yet ready to cross that river. However, he may be persuaded to allow CBRT to hike rates to increase the attractiveness of TL at least to domestic savers. If not, a run on Turkish banks and soft capital controls within a month are a strong possibility. The Cosmic Dude is writing this essay at 12:30 am Istanbul time, at which time dollar/TL traded up to 7.22-23 compared to ca. 6.00 at the end of 2019.While Turkey’s rate of currency depreciation is not as bad as South Africa, or Brazil, it has serious reel effects and thus must be stopped, if it doesn’t taper off by itself. First, as the economy is gradually re-opened, domestic demand will recover somewhat, which would allow faster pass-through from depreciation to inflation.Secondly, the corporate sector, already weakened by two months of nearly zero cash flow and new loans taken on to survive th...