Turkey's Economy Is Just Fine ...

[Kate Turlington + 44]

Erdogan (surprise, surprise) came out Sunday saying that Turkey's economy is fine and doesn't need the IMF (ever) and will never allow the country's (as long as he lives) to fall under the yoke of the conspiratorial institution. There are two dates the market will be watching: October 12--the next hearing for the American pastor; and October 25--the next Central Bank meeting. Will they hike rates even though Erdogan is once again acting all offended about it?

[Jan van Eck + 7,558]

4 hours ago, Kate Turlington said:

Erdogan (surprise, surprise) came out Sunday saying that Turkey's economy is fine and doesn't need the IMF (ever) and will never allow the country's (as long as he lives) to fall under the yoke of the conspiratorial institution. There are two dates the market will be watching: October 12--the next hearing for the American pastor; and October 25--the next Central Bank meeting. Will they hike rates even though Erdogan is once again acting all offended about it?

In February (2018) the Turkish Lira was trading at 26 US cents.  Today it is at 16 US cents, roughly  half.  Thus, imports to Turkey, which include oil products ($7.3 billion), automobiles ($10.3 billion), and aircraft ($4.2 billion), have now doubled in cost.  That hurts, and it seriously sucks money out of the Turkish economy, and thus out of the disposable income of Mr. and Mrs. Average Turk. 

While the depreciated currency grants Turkey the ability to sell its production to its trading partners and either receive more for that product, or in turn undercut its competitors, nonetheless Turkey exported $156 B and imported $186 B, resulting in a negative trade balance of $29.6 B  (2016 figures).  It is that negative trade balance that has effectively doubled in terms of the Turkish currency, and that causes the pain. 

As the currency falls, the holders of liquid assets move those out of the country, as the drop in exchange value is in effect a tax on capital.  Having half your liquid assets taxed away in eight months does not go over big.  For countries with oligarchs (such as Russia and Ukraine), these currency drops hit hard,  although in all candor if you are worth a billion US dollars and the exchange rate drop now means you are only worth a half billion, it is not as if you have that much less to spend on yourself!   

But the movement of liquid capital - called "capital flight" by economists - has the effect of lowering currency reserves, making it hard to finance any imports.  So the Central Bank puts up the interest rate in an effort to reward liquid capital for staying put.  If the rate gets high enough, it might entice more risk capital to be placed inside turkey, chasing those returns - but balanced against the risk of loss though further currency devaluations.  To see this in action, look at Venezuela, which cannot attract any capital, as its inflation rate is running over one million percent, making the currency totally worthless. 

In September, consumer prices jumped 6.3%,for a true annual inflation rate of over 75%, if the rise in price levels is sustained.  Based on historical climbs, the overall inflation rate excluding energy is at 24.7% - but that includes a blending of previous months, and the rate has been rapidly rising, up from 10.85% in April.  So Turkey is on a freight train to oblivion; it has to get off, and there is no obvious exit, except perhaps the removal of Erdogan.  Is he about to leave?  I don't think so. 

Will Turkey end up where Greece is?  Probably.  Although I expect it to end up worse than Greece, because you have an irrational leader, and that creates its own instability.  Money always flees instability. 

 

[Tom Kirkman + 8,860]

1 hour ago, Jan van Eck said:

So Turkey is on a freight train to oblivion; it has to get off, and there is no obvious exit, except perhaps the removal of Erdogan.  Is he about to leave?  I don't think so. 

Will Turkey end up where Greece is?  Probably.  Although I expect it to end up worse than Greece, because you have an irrational leader, and that creates its own instability.  Money always flees instability. 

Maduro and Erdogan, the Musical.  A singing and dancing extravaganza.  Soon to be a major Broadway hit.  Guest appearance by Baghdad Bob.