Back in 2017, when Turkey’s economy was booming faster than China’s, Charles Robertson of Renaissance Capital expected it to end well. Less than a year later, the lira collapsed under an overheated economy and balloon debt.
Now, Robertson plans to repeat that cycle within the next two years.
The rally in Turkish assets made the lira the best currency to play since it was shaken at the central bank and finance ministry in November. Some investors backed the gains by promising that President Recep Tayyip Erdogan would allow the new team to pursue a normal monetary policy after several years of failed inflationary efforts while ‘ in which they kept interest rates low. The lira halted three days of decline on Friday, culminating after central bank Governor Naci Agbal pledged policies to temporarily dampen price growth.
Robertson, London’s chief global economist at Renaissance, is not sure. Here are some of his comments from Wednesday’s interview:
Boom-and-bust circle
“My current position is that we are heading back into another boom-and-bust cycle, with cuts in interest rates in the second half of this year leading to strong credit growth. in 2022, just ahead of the primary election in 2023, and then we get another crash. “
Is this time different?
“We have seen so many times that Erdogan has been persuaded that he needs to do something.” Each time, the cost has grown higher and the benefits have become more short-term. You look at flat rates across the globe today and look at where Turkey is. All other emerging conventional markets have interest rates below 5% now, except Turkey.
“I don’t have much confidence that Erdogan has learned his lesson.” His comments just a week ago suggest, yes, that it is up to him now, but as soon as he gets the chance and certainly ahead of the 2023 elections, one would expect that Turkey would go on the credit growth model again. “
Addressing options
“Once again, Turkey has a choice. He still has very cheap money; it can go down an export-driven model that supports its current account and includes the dollars and euros that can be used for investment. I would like to see the central bank able to control inflation permanently through a long period of high interest rates and at the same time cheap money helping exports and helping rebalance the Turkish economy away from spending . That was the better long-term story for Turkey, but less encouraging for growth. It’s kind of a growth scenario maybe 3% or 4% per year, not 6% or 7% for a few years and then a crash. “
Controlling inflation
“Markets need to see the test in stable interest rates over time. Right now, we don’t even have good interest rates: the central bank rate is close to the same rate as inflation. Markets can assume that inflation is going to settle thanks to the cycles we have seen. But what the central bank has to do is to maintain real rates on a forward-looking basis, and the only way they can prove to the market that they are doing so is by doing so. . “
Shorter circles
“I suspect the energy and physical activity needs to be short now, like a year or two. They can’t do a five-year vigor. Yes, you can borrow for a while but you will explode yourself very quickly. (In the past) banks had enough investments for a loan, but now they don’t. If they want to lend, they can borrow a lot of money from abroad, and that then starts ramping up the debt out of nowhere and then markets become anxious (and) the lira begins to come under pressure very quickly. “
Speak Hawkish
“I don’t think there’s anything they can do now.” There’s nothing verbal they can say, and of course too much walking rates would be a mistake because it’s not essential to the economy. I think inflation is about to come down; it would be foolish to raise rates even more now. The best they can do is show over the years that the model has changed. “
Preview for the Lira
“My view is that the lira will be around 7 per dollar by June as the central bank will be under pressure during the first half of 2021, and I think we will see pressure from December for Erdogan to cut rates by December. . And we at the beginning of the market will lose faith again in the credit of the central bank. “
Global Development Models
“Egypt continues to pay very high rates today because it has taken so long to prove to the market that Egypt is changing. It has been costly for Egypt, and it will be very costly for Turkey to prove this as well. Turkey needs to provide a good positive yield for foreign and domestic investors on bonds for at least two to three years before the markets feel that the model has changed. “
What to buy
“For bond investors, I think it’s been a good trade since November but you put your money there for a few months. It’s a bit like cycling Bitcoin; a few months in return will be good and you’ll find out because you can’t be so confident in the long run. I think the Turkish lira bonds are good value now, but I would probably sell them in the first half of next year. My question in the second half of this year is: when will I sell? “
To be sure
“I would be wrong, because of the Turks and their savings and their relative position in the world. Turkey has an opportunity to change. Turkey is a prosperous business economy with a good, educated workforce. It has the potential to be a strong growth story – perhaps the best – in Europe ‘s timeframe for the next 10 years with the right policies. “