The lira is in free fall, and the entire Turkish economy is reeling from its effects, suffering in silence, praying for deliverance. In his three-day state visit to UK this week, President Erdoğan gave lengthy interviews to financial outlets and met major investors for dinner, presumably to stop his currency’s fall. What happened? The lira lost another 5 percent against the dollar, declining from 23 cents a lira to 22 cents. It seems that we don’t have a good story to tell the world any more, and the world votes with its cash.
Success in life depends on gluing your audience to their seats by telling them a convincing story. To do that, you need to establish a pattern. Portfolio managers are no exception. They look for “positive” stories about patterns in their country of interest, whether they exist or not. That’s their specialty. This week in London, Turkey failed to display what portfolio managers are looking for. Why?
Just look at the patterns. The world has passed from quantitative easing (QE) to quantitative tightening (QT), yet Turkey seems not to have noticed. The country has no plans to move from leveraging to deleveraging, and it is beginning to show. We are even going the opposite way – our politicians tell us stories about more grandiose projects requiring additional tens of billions of dollars of debt. For anyone who knows what international markets are like today, that should sound scary.
Prudence requires quite the contrary. There is less cash flushing through the system, and countries like Turkey need to deleverage, meaning it should take steps to reduce its debt. An orderly deleveraging program avoids both insolvency and illiquidity. If there is less liquidity chasing a lot of bonds globally, global borrowing costs tend to rise. You cannot lower your borrowing costs by keeping your rates low in this global setting. If you insist on keeping your rates lower, you simply cannot borrow.
As far as stories go, this may be the financial equivalent of a car crash in slow motion. It’s not going to make your audience of investors stick around, I’m afraid. That’s why there was a rush to the exit right after that unfortunate dinner with investors in London. Our government was raising expectations of insolvency and illiquidity.
Portfolio managers were not bedazzled but bewildered by what they have heard in London this week. Turkey’s need for a new storyline has become more imminent. The country is due to hold elections in five weeks. This will be the first election since 2002, when the governing AK Party rose to power, in which the economy is to play a significant role.
One of the simple ways of projecting confidence would be to name someone to run the Turkish economy right after the elections. This name would signal that Turkey will adjust to the global movement from QT to QE. It’s not rocket science, if you ask me.
There is no arguing with facts. Time will tell whether we can learn from our mistakes.
This commentary was published in Hürriyet Daily News on 19.05.2018
