Reuters has published an analysis on the possibility of a new currency crisis in Turkey. In the analysis, the $30 billion risk that will appear in currency-protected deposits this summer and election discussions were discussed.
The 9% depreciation of the Turkish lira this month and the fact that foreign currency borrowing costs approached double digits and surpassed the highs of the 2008 crisis had investors wondering whether the country was headed for again towards a monetary crisis.
The main market agenda is whether to renew the currency-protected deposit scheme (KKM), which enabled the government to reverse the currency crisis in December, albeit for a time, at the end of term.
“THE ELECTION WILL BE FINAL”
The ability of President Tayyip Erdogan’s government to prevent further market turbulence after the currency crisis late last year will also determine its chances of being elected and the potential return of foreign investors.
He worries about the sustainability of market economy policies, especially exchange rate policy, which bankers define as publicly controlled, and that things are spiraling out of control again just 5 months after the previous crisis.
The management of the economy succeeded in stemming a major currency crisis in December by developing the KKM system to protect savers and businesses from the massive depreciation of the TL and to persuade them not to hoard dollars, euros or euros. gold.
KKM BACK TEST IN SUMMER
As KKM’s critical summer renewal dates approach, markets have also been tracking the demand for currencies that can be created by high yields of $10 billion.
According to data compiled by Reuters with the opinions of 4 economists, there will be a return of about $20 billion in KKM in August, and the biggest return of the year will take place this month. The total amount of return in July and August is $30 billion.
“There is a risk of losing control”
ABRDN fund manager Kieran Curtis, who has witnessed repeated turbulence in the Turkish market in recent years, said: “For Turkey, the crisis is not a certainty, but the probability is certainly far from it. nothing. “They run the risk of losing control,” he said.
While the Net Central Bank International Reserves (CBRT) fell below the $10 billion mark as of May 20, the decline over the past 5 weeks reached $10 billion. Non-swap reserves, on the other hand, fell to minus $55 billion over the same period, approaching minus $60 billion again, prompting major political and economic shifts.
Erdogan’s government says the effects of the war in Ukraine on the economy have manifested themselves in inflation, which has delayed efforts to turn falling inflation into a rising current account balance . The CBRT, on the other hand, claims that disinflation will start after a while.
There are also fresh concerns over Turkey’s thorny relationship with the West, after Erdogan said he would veto Finland and Sweden’s bids to join NATO, accusing them of harbor PKK and YPG affiliates.
HOW WILL SUMMER END?
Record global energy and food prices, combined with the almost 20% depreciation of the Turkish lira and 50% growth in domestic credit this year, are pushing inflation towards 100%. Even so, the CBRT kept the key rate unchanged at 14% last week.
JPMorgan and Citi analysts point to sharp declines in foreign exchange reserves and this will continue. Citi estimates that the current account deficit-to-GDP ratio will hit 5% this year due to record energy and food imports. Still, the two institutions expect revenue of $15 billion to $20 billion with the influx of tourists to Turkey this summer.
Additionally, investors began to seriously wonder what would happen to the KKM’s returns. In just two months, 30 billion KKM returns from individuals and institutions will need to be renewed. Otherwise, the already high need for foreign currency will increase even more.
JPMorgan’s Zafar Nazim thinks the government could offer incentives, such as new tax breaks, for companies to refinance the KKM. Another expectation is that the public will prevent the FX trend with short-term high-yielding products during this period.
Daniel Moreno, emerging markets fixed income manager at Mirabaud, who said he sold the last remaining Turkish bonds during the currency crisis last year, said: “You can’t just offer anyone a payment to protect against currency weakness. I don’t think it’s sustainable,” he said, adding:
“I don’t think anything has improved since then, on the contrary, it seems to be getting worse day by day. But I still don’t believe that Turkey will fall without a fight.
After its troubles in recent years, far fewer foreign investors now hold a stake in Turkish bonds. The government is pushing the idea of currency-protected bonds in an attempt to turn the tide, but foreign investors still fear that at some point capital controls will trap them.
Market tensions have exacerbated the plight of Turks and individuals are struggling to pay rapidly rising household bills. All of these concerns raise the question of whether the elections due to be held in June 2023, at the latest, will be delayed.
Polls show that Erdogan has regained some of the votes he lost during the December currency crisis and that the AKP is still ahead of its rivals. However, voting rates are much lower than previous elections, and some polls clearly show the possibility of losing the majority of Turkey’s Grand National Assembly and possibly even the presidency to an opposition coalition.
One issue on which foreign investors agree is that if Erdogan is not elected, Turkey’s unconventional economic policies will come to an end and they themselves will return to the country.
“Turkey’s entire investment capacity depends on the outcome of the election,” said Petar Atanasov of emerging markets fund Gramercy. Atanasov says many international investors, like him, expect a leadership change that will redefine the country’s economic and monetary policy. Atasanav said, “I think the market will be quite skeptical until the end. “It will be an extremely uncertain election, anything can happen,” he said. (Reuters)