Dictators don’t have a good track record of financial management.Just look at Russia,Venezuela, Argentina, etc. if you don’t believe me.Okay, China may be the exception but I don’t think the fat lady has sung there yet.Turkey is channeling Russia big time right now and this will not end well. Stay away from the lira.
The problem is the same tired old scenario that we are unfortunately seeing too many times around the globe these days.Of course the situation in Turkey has the special circumstance that we are dealing with the old Ottoman Empire right next door to the Islamic State and a rising Iran, but that’s another story altogether.
It’s not hard to see what is going on; it seems that Turkish President Recep Tayyip Erdogan, contrary to his earlier assurances, wants to take Turkey in the direction of a totalitarian Islamic state, complete with Sharia law and the accompanying acts of brutality. He wants to micromanage the economy.In short, he wants to become a dictator to force his will upon the people for their own good. Where is Kamal Attaturk when you need him?
But seriously, the main problem is that Turkey has a large current account deficit. They fund this deficit with mostly short-term dollar denominated loans. As the dollar continues to rise, Turkey is finding it harder and harder to repay these loans. Inflation is rampant. The central bank has raised interest rates significantly to attempt to counter this inflationary cycle but is now facing serious political interference from the government, even going to far as to threaten to put central-bank chief Erdem Basci in jail for this rational policy.
“Turkey needs very serious policy reversals in order to attract more foreign investors,” said Ben Rozin, a senior analyst and portfolio manager at Manning & Napier, which manages $46.7 billion in assets and has almost no exposure to Turkey. “We’ve got basically no confidence in Erdogan and the way he runs the country.”
Reuters reports, Turkey’s still-large current account deficit makes it vulnerable to any fall in U.S. investment flows to emerging markets, said Luis Costa, head of CEEMEA debt and FX at Citi. “Lira is not only suffering because of Erdogan’s continuous criticism of monetary policy. (It) sells off because the current account gap still translates into a sizeable daily financing need,” Costa said. “Heavy reliance on short-term dollar borrowing makes this balance of payments very volatile. As usual, currency is the first channel to absorb the shocks.”
Analysts such as Mr Rawkins argue that Turkey needs to rebalance its economy through structural reforms that increase productivity and savings, but Mr Erdogan instead appears to be seeking growth through lower interest rates and a weaker currency. Mr Erdogan’s quest for bolstered presidential powers — a focus of this year’s elections — is also a big factor affecting the country’s prospects. “If we move to a presidential system of government, there is a greater risk of less credible policies, less rule of law, more institutional risk,” Mr Rawkins said. But he added that the country’s outlook “did not look that bad relative to other large emerging markets such as Brazil and Russia”.
The lira is down over ten percent against the dollar this year alone. I don’t believe the political, economic, or fiscal situation will get better in Turkey anytime soon. As I said, Ergodan is channeling Putin.The only thing that will make things better in Turkey is a change in leadership.
The upcoming presidential election will provide insight into Turkey’s future. If Ergodan (most likely) wins and continues down the path of totalitarianism and government interference in the economy, there are very dire times ahead for the old Ottoman Empire.Turkey did well in the first decade of this century because the economic policies were much more liberal. Why do autocratic rulers always think they are smarter than the free market? Why do they always think they can micromanage the economy? It’s never worked in history but Ergodan seems to think it will be different this time. It won’t be
L.Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to Fox Business, Newsmax TV, and others. LToddWood.com
