May 22 2019

Turkey’s financial options may be running out – Reuters

Turkey’s options to rescue itself from the spiral of a weakening currency and a painful economic downturn are becoming more and more limited, Reuters reported citing analysts.

Should foreign investment run out and cash buffers become exhausted, Turkey may have few financial options left other than building large current account surpluses that may require a much deeper and longer domestic recession, Reuters said.

The Turkish economy’s needs are huge and Turkey may require $40 billion to $90 billion to avoid a sovereign default should it be frozen out of international borrowing markets, according to the news service.

For many economists, Turkey is already in the middle of a textbook currency crisis, Reuters said.

If Turkey needs to borrow more from abroad to help fund an economic revival, it will have to pay higher interest rates than yields on its current 10-year bond, which already exceed 8 percent, debt capital market bankers and fund managers predict, the news wire reported.

While borrowing abroad could plug some holes, it won’t be enough should pressure on Turkey from investors continue to increase, Reuters said.

Meanwhile, an IMF programme, which would bring credibility and assurance for investors, is unlikely as President Recep Tayyip Erdoğan is vehement in his opposition to such a deal.

Talks with Qatar on more funding – the country supplied a few billion dollars in swaps at the height of a currency crisis last year, have gone nowhere, Reuters said. The European Union, which has bailed out Greece, did so only with strict IMF conditionality and supervision, it said.

Turkey’s budget deficit swelled to 68 percent of the government’s year-end target in the first four months of the year, a trend that looks unsustainable. The gap would have been far wider had it not been for the 37 billion liras ($6.1 billion) that the government tapped in January from the central bank’s profits.

But one-off revenue-raising sources are drying up. Turkey had offered an amnesty on the building of illegal properties this time last year in return for cash. Now the real estate market is in a crisis. Meanwhile, tax revenues have slumped due to a deep economic downturn.

Turkey also has the option of introducing capital controls to stem weakness in the lira and lock in capital. The country has already tinkered with currency flows – local banks stopped lending briefly in the offshore swaps market in March, sending rates there soaring to an annual 1,300 percent, and regulators have introduced minor curbs on dollar transfers.

Financial markets seem to be pricing in more such policies, Reuters said. But if Turkey were to introduce tight controls, foreigners may stop investing in the economy, forcing the government to reduce spending and making a recession worse, analysts said, according to the news wire.

At the same time, if Turkey were to follow Russia and tame its crisis with stringent inflation targeting, the central bank would have to reverse course and tighten monetary policy, Reuters said. It lowered interest rates just this week and Erdoğan strongly opposes rate hikes saying they are inflationary.

“The central bank should be a key actor to rescue the country,” according to Nikolay Markov, senior economist at Switzerland's Pictet Asset Management, Reuters said. “The only way to deal with the crisis is to show commitment to fighting inflation by hiking interest rates to bring inflation down more in line with targets and contain lira depreciation.”

https://www.reuters.com/article/us-turkey-currency-scenarios-idUSKCN1SR1XL