Turkey’s economic outlook and failed attempts to nurture investor interest in Turkey, it is expected that the Lira’s future will be bleak.
Turkey needs cash
The Turkish economy has been highly dependent on foreign credit since the 1980s. The economy is built around the need for consistent foreign cash flow, and any glitch causes major economic problems just like it did last summer, where the Lira depreciated by more than 40 percent. As the municipal elections end, Erdogan’s government is desperately trying to lure investors for inflows to boost the economy and increase growth while trying to heal the wounds of the Lira Crisis.
The desperation comes from the fact that the Central Banks reserves drastically decreased in the last month by $5 billion, leaving Central Banks immediate reserves on $26.9 billion only. Investors are justifiably worried since Turkey has obligations to pay $118 billion in the next 12 months.
Albayrak, Minister of Finance and Treasury, and his team travelled around trying to ease investor concerns, presenting policies to better the Turkish economic situation. Investors were unconvinced especially due to the newly initiated infrastructure projects that promised little profit and seemed to only be in place to reduce unemployment.
The investors, seconded by Moody's, demanded high yields on their credit. Albayrak continues to lose credibility and agency over the state of the Turkish economy.
High Inflation
Inflation, another serious economic problem for which no healthy solution has been implemented, has been rising rapidly after the Lira Crisis. In October, Consumer Price Index peaked at 25.24 percent which was the highest in 15 years. Despite the radical measures of The Erdogan government, it only lowered to 19.71 percent in March on a year over year basis.
Inflation is the greatest in food, especially fruits and vegetables. Consequently, the government decided to take some concerning countermeasures, beginning with removing the tariffs on vegetables, highly damaging the local producers, and threatening corporations with high vegetable stocks in their warehouses to force them to sell at sub-market prices.
Were it not for these unsustainable anti-inflationary policies, inflation would be substantially higher than the published data. In the long run, this measures would cause damage to the prospects of local businesses and drive Turkey further into a situation of trade deficit and resultant Lira decline.
Furthermore, aside from the anti-inflationary countermeasures, the inflation itself has a negative effect on Turkish companies, compounding the problems in capital markets started by the Lira crisis. Car producers took the biggest hit as car sales decreased by 59 percent from last year leading to substantial layoffs.
Due to inflation induced headwinds in the capital and consumer markets, as well as the direct currency impact of inflation, the Lira could very well see further declines.
Rising cost of debt
With Turkey's struggles to find cheap debt, they've been left looking to the Eurobond markets to mitigate investors' concerns with the Lira.
Turkey issued more than double the amount of Eurobonds, burdening Turkey with huge debt at a substantial 7.625 percent coupon rate, 50 percent greater than the rate on last year's Eurobonds.
Although the Turkish economy does not look very promising lately with the recent crisis and fundamental problems, investors have eaten up these high-yielding Eurobonds, with the issue being oversubscribed by 2.6 times. Lately, even the Turkish citizens have been choosing Turkish Eurobonds to their conventional investment plans, as they are promising very high yield.
This is because the Turkish Eurobonds may not be as dangerous as the credit rate of Turkey suggests. Though, there are plenty of economic indicators that look negative, Turkey still has the IMF card to play in the case of another currency crisis.
Trade Deficit
The weakening Lira has significantly decreased imports by 21.45 percent in the first quarter of 2019, with exports increasing by 3.34 percent in the same period. Turkey’s negative trade balance shrank last October and stayed in the moderate levels even after Lira increased against the global currencies.
The decreasing trade deficit may seem promising for Turkey as they have been struggling with growing negative trade balance for a long while.
Opportunities come with risk
In conclusion, the economic situation looks uncertain, but the Turkish economy is still not chaotic enough to predict default in the foreseeable future. Turkish currency is highly volatile, investing in Turkish Lira bears high risk but Turkish Eurobonds may be a more interesting alternative.
This article was issued by Maria Fenech, investment management support officer at Calamatta Cuschieri. For more information visit, https://www.cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.