The Kapali Carsi

Turkey: The markets’ Cinderella Man

Seen as one of the most vulnerable emerging markets (EMs) not too long ago, Turkey is on a Cinderella run, attracting significant capital inflows. Foreigners’ net equity and bond investments rose by $0.9 and 1.4 billion respectively during the last four weeks.

Here is the intro. to my latest Hurriyet Daily News (HDN) column, where I explain why Turkey is continuing to attract money. Like the previous one, this column is based on a reader request: Why is so much money continually pouring into turkey? Why aren’t lines of credit closing down there? Is the risk building? What’s the nature of the risk? Since I have been so bearish on the Turkish economy, I thought that s(he) and other  readers deserved an explanation. Anyway, you can read the whole thing at the HDN website.

I have a few additional points to make, but before that, a small update on my health status: I upgraded to being a real superhero on Friday rather than merely their “manager”. I have problems with both eyes now, and so I am more like Daredevil rather than Nick Fury!:) Anyway, that’s why I could not  post Friday’s column until today. Anyway, on tp the addendum:

First, most Turkey economists found the Central Bank’s hold on rates hawkish and credibility-enhancing. However, I would argue that the Bank was prepping for a rate cut with the more comforting tone on economic activity and inflation. Add this to the Bank’s recent moves, such as the rise in the limit for export rediscount credits and remunerations on lira required reserves, and I am even more convinced that they will be cutting rates early in the year. Basically, they want to use the window of opportunity created by falling inflation (because of base-year effects). I agree with Turkey Data Monitor’s Murat Ucer that they will be “first testing whether the lira can handle lower rates within the corridor, before playing with the corridor itself and/or lowering the reference rate“. But when they do, they willl undoubtedly have pleased Supreme Leader President Prime Minister Recep Tayyip Erdogan, who would need lower rates before the crucial general elections.

BTW, it is important to note that while almost none of the economists surveyed by business channel CNBC-e were expecting a rate cut, market had started to somewhat price a cut a couple of days before the rate-setting meeting. Not only the short-end was rallying, as I mentioned in the column, demand for the Treasury auctions was quite decent as well. Anyway, economists won this time…

And if you are wondering why lower oil prices are whetting investors’ appetites on Turkish assets, a picture is worth more than a thousand words, courtesy of Capital Economics- I could not link to the whole report, as thy are a subscription service..

Moving on, space constraints prevented me talking about corporate FX borrowing risks, but the Turkey IMF Article IV conclusion, which was published on Friday, mentions those. On the one hand, it is good that banks can easily roll over their debts, but as the IMF emphasized as well, such reliance on external wholesale funding is risky. The same goes for corporates’ external borrowing.
Anyway, I am off for a night of Besiktas, first football against Tayyip’s Kasimpasa then hoops against arch-rivals Galatasaray. Have a great Sunday, or at least whatever is left of it…

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