Pre-Holiday (Contrarian) Musings

TURKEY - Report 23 Jun 2017 by Murat Ucer

Turkish markets will be closed on Monday-Tuesday, as part of the end-of-Ramadan holiday (Eid Al-Fitr) that starts over the weekend. We thought it’d be useful to recap some of the recent data releases and share a few somewhat contrarian thoughts on where things stand on the economy front.

Turkish growth is on steroids for the moment, which, combined with a carry trade-friendly backdrop, is leading to the usual market euphoria of sorts. There is no denying that the risks to our growth forecast for this year -- of around 3.5% -- are now firmly and markedly on the upside, but one should not lose sight of the bigger picture. The growth outlook remains bleak for at least two reasons. First, throwing lots of credit after an economy through a guarantee scheme when the funding base is not growing as fast, is almost sure to prove problematic and/or unsustainable. Second, massive shocks to the country’s social and human capital and the ongoing weakness in machinery and equipment investment must take their toll on the country’s potential growth rate over the medium term.

The Bank is doing the right thing, partially, by keeping the funding rate elevated, which is helping to stabilize the lira, but with all the stimulus at work, it is doing little to slow the economy. We are pretty sure that the Bank will feel the heat when credit growth slows in due course, barring more ad-hoc and distortionary interventions by the government, like loan securitizations.

The budget’s unprecedented pace of deterioration has taken a pause in May, which may last a few more months, but the problem is structural because a projected growth slowdown, lower non-tax revenue and an inability to curb primary expenditures will take their toll on the budget. Mr. Naci Agbal, the Finance Minister, is earnestly arguing otherwise, and we sure would like to give him the benefit of doubt, but we think that the days of fiscal prudence and/or moderate deficits are basically over.

The Lira has strengthened through the 3.5 mark (against the dollar) in recent weeks, but having failed to hold on to the gains, it was hovering just above that at this writing. We are not too surprised, given that the sentiment is relatively fickle (against a difficult political backdrop) and the “structural” demand for F/X remains elevated. Meanwhile, the credit guarantee scheme, otherwise an ill-advised measure, seems to be helping the corporate sector narrow its F/X position directly (by way of restructuring F/X loans into TL) and indirectly (by way of providing the liquidity to hoard F/X deposits). Yet, combined with ongoing weakness in balance of payments financing, this means that pressures on the lira must remain elevated.

Now read on...

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