Mark Bentley
Dec 26 2017

Lira appears most vulnerable of emerging market currencies in 2018 - expert

Timothy Ash, an emerging markets senior sovereign strategist at BlueBay Asset Management in London, responds to Ahval’s questions about the state of Turkish politics and the economy and his outlook for 2018.

Despite a 14-year record inflation rate of 12.98 percent in November of this year, Turkey boasted a growth rate of 11.1 percent in the third quarter. Ash weighs in on these figures and analyses what Turkey is facing as it heads towards the 2019 elections.

 

The government has said inflation is expected to drop into the single digits early next year and remain there. What is your outlook on Turkey’s inflation going into 2018?

Base period effects should eventually help, but this also depends on exchange rate stability. Also, that oil prices are not higher. I think we could be surprised now at how sticky inflation is and unless we see further tightening from the Central Bank, I think inflation will stay around 10 percent.

Do you think we are over the worst, as far as the impact of the Zarrab case on financial markets is concerned?

Well, on Zarrab, I’m not sure the case has revealed anything we did not know anyway from the Dec. 17 (2013, corruption case) events. The market seems to be taking it in its stride. The key will be what the verdict is, and assuming it is guilty, (Zarrab has already pleaded guilty) what the U.S. government decides to do in terms of determining responsibility from Turkish institutions and how big any fines are. Then the question will be, will Turkey accept fault and pay any fines levied?

In terms of the economy, what do you see the government doing to stimulate it in 2018 and how much room does it have?

Well, there is still some room on the credit guarantee scheme of up to 100 billion Turkish lira, with redemptions. The fiscal side is still a strength for Turkey and I am not sure the Turkish authorities will be in a big rush to retighten from last year. They have also proven quite innovative as reflected in the credit guarantee fund, so we might expect more or similar measures. And to the credit to the Turkish authorities, the credit guarantee scheme has been a huge success; most economists like myself were sceptical at the outset. I assume monetary policy will remain loose, as the Central Bank now has a track record of targeting growth over inflation.

What do you think the government’s main concerns are regarding the economy as we head toward a double election in 2019?

The biggest question is the economy overheating. Given high and rising inflation and a large and widening current account deficit, the current rate of growth is unsustainable. I guess the authorities would counter that growth; it already seems to be slowing as reflected in higher frequency indicators. The risk for me is on the external front, with a large current account deficit and weight of short term debt funded by hot money inflows. So far, the Turks have been fortunate that global markets have been forgiving. But, if that changes then things could get ugly for the lira with then a risk to inflation.

What are the chances that the government might bring the 2019 election forward?

It’s possible if the economy is doing well, albeit (Recep Tayyip) Erdoğan has made a thing of not being pushed into early elections where he can help it. In the end though, Erdoğan’s re-election chances depend on the economy.

Political noise has been a major contributor to the performance of Turkish markets in 2017. How important will the political climate be going forward?

I guess there is always a lot of political and geopolitical noise in Turkey - it goes with the turf. As an analyst, the skill or challenge is knowing what is important and priced in already by the markets. The key for 2018 will be the state of relations with the West. Two thirds of Turkey's trade, investment and financing comes from the West so I don’t think Erdoğan can risk keeping relations as poor as they are now if he wants to win a re-election.

What is your outlook on Turkish-U.S. relations?

As I’ve noted above, the key is to watch. Both sides should have a common interest in normalising (relations). But, (Reza) Zarrab, Syria, Gülen, Russia and now the Jerusalem issue are all grating relations. At least the (Donald)Trump-Erdoğan relationship seems good on a personal level. For me though, it depends if Erdoğan thinks he can win the elections just on the economy. If not, he will bang the nationalist drum, which would suggest pressure points still with the U.S.

What is your prediction for the value of the lira next year and your thinking behind that estimate?

I’m not able to publish forecasts in my current role; however, if the Central Bank does not tighten appropriately and if global markets move risk off, then the lira looks most vulnerable amongst emerging market currencies.

What do you see where the trajectory of interest rates is concerned?

It depends on the lira. If the lira stabilises and even strengthens as inflation moderates, then rates could drop. But if the lira comes under more pressure, the Central Bank might have to hike - and quite significantly at that.

Looking at banks - what sort of risk do you associate with the level of nonperforming loans and "loans under close monitoring"?

At this stage, I’m not overly concerned as the underlying strength of banks is still strong. Big Turkish banks are prudent and risk-savvy. Also, I think the regulatory environment is still robust. I guess also the 11 percent third-quarter growth hides a lot of sins, but if Turkey is facing an economic crisis, I don’t think it starts from the banks, but from the exchange rate and the balance of payments.