The Executive Presidency of Recep Tayyip Erdogan and post-election governance changes have reopened questions around the overall direction of economic policy making. Turkey requires a credible economic programme that prioritises sustainable growth.
President Recep Tayyip Erdogan’s appointment of Berat Albayrak, his son-in-law, to run the economy, alongside planned changes to the governance of the central bank and remarks about the lowering of interest rates have raised renewed concerns surrounding Turkey’s post-election monetary, fiscal and financial stability outlooks.
The Turkish lira traded at 4.8 to the dollar at the time of this writing, down around 22% since the start of 2018. Scope is closely monitoring developments in Turkey (BB+/Stable).
Scope analyst Jakob Suwalski explains what is at stake.
Investors appear nervous about the outlook for Turkey. Are they right to be?
Turkey is vulnerable to external shocks, as shown in the economy’s recent history—especially in an environment of global rate normalisation and current wider emerging market stresses. President Erdogan’s victory in elections last month has given him extremely broad powers. These capacities range from the ability to rule by decree, to the means to stamp out dissent (evidenced in July dismissals of more than 18,000 civil servants), to greater influence over monetary policy. The appointment of his son-in-law and departures of economic-moderates such as Deputy Prime Minister Mehmet Simsek cast a cloud over the quality and direction of policy making over a longer-term window moving ahead, with the President having a mandate until 2023. Further weakening of Turkey’s policy framework could thus have significant credit relevant implications. In the short term, elevated capital outflows would accentuate prevailing external vulnerabilities, in view of a current account deficit of above 6% of GDP and moderate levels of FX reserves of USD 133.5bn as of April.
Why is inflation such a concern for investors?
The central bank’s rate hikes in May and June, taking the policy rate to 17.75%, were steps taken to reconvince investors of the bank’s ability to combat high inflation. However, with the pass-through of currency devaluations, inflation reached 15.4% YoY in June—the highest level since December 2003 and well above a central bank target of 5%. Hence Turkey’s real policy rate is reduced.
In Scope’s view, monetary and fiscal policy ought to be kept tight if not tightened in order to stabilise the lira and lower above-potential economic growth (7.4% YoY in Q1 2018, which Scope expects to slow to 5% for the full year 2018). Instead, changes in economic governance raise questions for policy making independence, and Erdogan’s comments on low interest rates have at the minimum increased uncertainty surrounding future rate decisions and amplified investor concerns. Focusing Turkey’s economic agenda on lower but more sustainable growth is the most direct route to increasing the credibility of Turkey’s policy making institutions and, in turn, lessening inflationary stresses. The treasury and finance minister Albayrak has highlighted that the main economic priority will be on reducing inflation with the help of monetary and fiscal policies. Scope notes that the next central bank Monetary Policy Committee meeting comes on 24 July.
Doesn’t currency weakness and high inflation push up interest rates and external funding risks, making it more expensive for companies to service both local- and foreign-currency loans?
10-year Turkish local bond yields have increased to above 17%, and the weakening lira has undoubtedly made it harder on Turkish borrowers to repay external financing requirements, which total about 25% of GDP this year, roughly in line with the ratio of recent years. External debt maturing within one year as of the end of Q1 2018 amounted to USD 182bn, of which 57% was owed by the banking sector, 40% by the non-financial private sector, with the remainder by the government.
The lira’s decline has driven up costs on foreign-currency loans, causing a balance sheet mismatch between income streams and debt servicing costs. This is important given the Turkish private sector’s significant foreign-currency-denominated liabilities. The central bank’s actions in May to make it easier on exporters to repay foreign-currency debt, while a step in the right direction, do not go far enough. The external debt is, however, structured robustly and banks have sufficient foreign currency liquidity such as to limit the economy’s exposure to sudden capital outflows and short-lived market shutdowns to an extent, increasing the probability of many borrowers being able to bridge a crisis.
Bank of England’s Haldane says inflation “tiger” is prowling
By Andy Bruce and David Milliken
LONDON (Reuters) – Bank of England Chief Economist Andy Haldane warned on Friday that an inflationary “tiger” had woken up and could prove difficult to tame as the economy recovers from the COVID-19 pandemic, potentially requiring the BoE to take action.
In a clear break from other members of the Monetary Policy Committee (MPC) who are more relaxed about the outlook for consumer prices, Haldane called inflation a “tiger (that) has been stirred by the extraordinary events and policy actions of the past 12 months”.
“People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely,” Haldane said in a speech published online. “But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag.”
Haldane’s comments prompted British government bond prices to fall to their lowest level in almost a year and sterling to rise as he warned that investors may not be adequately positioned for the risk of higher inflation or BoE rates.
“There is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets,” Haldane said.
He pointed to the BoE’s latest estimate of slack in Britain’s economy, which was much smaller and likely to be less persistent than after the 2008 financial crisis, leaving less room for the economy to grow before generating price pressures.
Haldane also cited a glut of savings built by businesses and households during the pandemic that could be unleashed in the form of higher spending, as well as the government’s extensive fiscal response to the pandemic and other factors.
Disinflationary forces could return if risks from COVID-19 or other sources proved more persistent than expected, he said.
But in Haldane’s judgement, inflation risked overshooting the BoE’s 2% target for a sustained period – in contrast to its official forecasts published early this month that showed only a very small overshoot in 2022 and early 2023.
Haldane’s comments put him at the most hawkish end among the nine members of the MPC.
Deputy Governor Dave Ramsden on Friday said risks to UK inflation were broadly balanced.
“I see inflation expectations – whatever measure you look at – well anchored,” Ramsden said following a speech given online, echoing comments from fellow deputy governor Ben Broadbent on Wednesday.
(Editing by Larry King and John Stonestreet)
Bitcoin slumps 6%, heads for worst week since March
By Ritvik Carvalho
LONDON (Reuters) – Bitcoin fell over 6% on Friday to its lowest in two weeks as a rout in global bond markets sent yields flying and sparked a sell-off in riskier assets.
The world’s biggest cryptocurrency slumped as low as $44,451 before recovering most of its losses. It was last trading down 1.2% at $46,525, on course for a drop of almost 20% this week, which would be its heaviest weekly loss since March last year.
The sell-off echoed that in equity markets, where European stocks tumbled as much as 1.5%, with concerns over lofty valuations also hammering demand. Asian stocks fell by the most in nine months.
“When flight to safety mode is on, it is the riskier investments that get pulled first,” Denis Vinokourov of London-based cryptocurrency exchange BeQuant wrote in a note.
Bitcoin has risen about 60% from the start of the year, hitting an all-time high of $58,354 this month as mainstream companies such as Tesla Inc and Mastercard Inc embraced cryptocurrencies.
Its stunning gains in recent months have led to concerns from investment banks over sky-high valuations and calls from governments and financial regulators for tighter regulation.
(Reporting by Ritvik Carvalho; additional reporting by Tom Wilson; editing by Dhara Ranasinghe, Karin Strohecker, William Maclean)
Britain sets out blueprint to keep fintech ‘crown’ after Brexit
By Huw Jones
LONDON (Reuters) – Brexit, COVID-19 and overseas competition are challenging fintech’s future, and Britain should act to stay competitive for the sector, a government-backed review said on Friday.
Britain’s departure from the European Union has cut the sector’s access to the world’s biggest single market, making the UK less attractive for fintechs wanting to expand cross-border.
The review headed by Ron Kalifa, former CEO of payments fintech Worldpay, sets out a “strategy and delivery model” that includes a new billion pound start-up fund and fast-tracking work visas for hiring the best talent globally.
“It’s about underpinning financial services and our place in the world, and bringing innovation into mainstream banking,” Kalifa told Reuters.
Britain has a 10% share of the global fintech market, generating 11 billion pounds ($15.6 billion) in revenue.
“This review will make an important contribution to our plan to retain the UK’s fintech crown,” finance minister Rishi Sunak said, adding the government will respond in due course.
The review said Brexit, heavy investment in fintech by Australia, Canada and Singapore, and the need to be nimbler as COVID-19 accelerates digitalisation of finance all mean the sector’s future in Britain is not assured.
Britain increasingly needs to represent itself as a strong fintech scale-up destination as well as one for start-ups, it added.
The review recommends more flexible listing rules for fintechs to catch up with New York.
“Leaving the EU and access to the single market going away is a big deal, so the UK has to do something significant to make fintechs stay here,” said Kay Swinburne, vice chair of financial services at consultants KPMG and a contributor to the review.
The review seeks to join the dots on fintech policy across government departments and regulators, and marshal private sector efforts under a new Centre for Finance, Innovation and Technology (CFIT).
“There is no framework but bits of individual policies, and nowhere does it come together,” said Rachel Kent, a lawyer at Hogan Lovells and contributor to the review.
Britain pioneered “sandboxes” to allow fintechs to test products on real consumers under supervision, and the review says regulators should move to the next stage and set up “scale-boxes” to help fintechs navigate red tape to grow.
“It’s a question of knowing who to call when there’s a problem,” Swinburne said.
($1 = 0.7064 pounds)
(Reporting by Huw Jones; editing by Hugh Lawson and Jason Neely)
UK seeks G7 consensus on digital competition after Facebook blackout
LONDON (Reuters) – Britain is seeking to build a consensus among G7 nations on how to stop large technology companies...
Britain to offer fast-track visas to bolster fintechs after Brexit
By Huw Jones LONDON (Reuters) – Britain said on Friday it would offer a fast-track visa scheme for jobs at...
GameStop rally fizzles; shares still on pace for 130% weekly gain
By Aaron Saldanha and David Randall (Reuters) – An early surge in the shares of GameStop Corp fizzled and left...
Oil drops on dollar strength and OPEC+ supply expectations
By Jessica Resnick-Ault NEW YORK (Reuters) – Oil prices fell on Friday as the U.S. dollar rose while forecasts called...
Stocks try to recover from bond whiplash, dollar gains
By Herbert Lash NEW YORK (Reuters) – Global equity markets swooned on Friday, even as the Nasdaq and S&P 500...