Currency Crisis – Turkish Market News

McKinsey Believes in Turkey Failure

In other words, they do not believe in Dr. Erdem Basci, the governor of the Central Bank of Turkey, who said “believe in me and win” while estimating year-end USD/TRY rate at 1.92 in a TV interview (for those who wonder, the rate has hanged between 1.96 and 2.08 since the interview).

Retuning to the subject, McKinsey released a marvelous report pointing to things that likely to happen after Fed decides leave its liquidity injection programme to revive the US economy.

Effects of Quantitative Easing have been main drivers of emerging markets for recent years. Ultra-low interest rates have created carry trade opportunities and caused the cash to flow into emerging markets from developed countries. This built on sand investment strategy has also established huge risks for a sudden dip in emerging markets.

Lately, global management consulting firm McKinsey released an absolutely-worth-to-read report on Fed’s zero interest rate policy and its distributional effects on global financial system. It categorizes in great detail the true consequences of Ben Bernanke’s decision to buy trillions of dollars in government debt and other securities, and the result of reining this programme in.

From 2Q09 to 4Q12, $700bn of net portfolio investments has flowed into emerging market debt. The inflows coincided with the start of the Federal Reserve’s asset-purchasing scheme. Just as the Fed begins stoking up securities on its balance sheet, investors move into emerging markets.

Focusing on Turkey, here are some memos from the report:

Ultra-low interest rates appear to have prompted additional capital flows to emerging markets, particularly into their bond markets. Purchases of emerging-market bonds by foreign investors totaled just $92 billion in 2007 but had jumped to $264 billion by 2012. This may reflect a rebalancing of investor portfolios and a search for higher returns than were available from bonds in advanced economies, as well as the fact that overall macroeconomic conditions and credit risk in emerging economies have improved. In some developing economies, including Mexico and Turkey, the percentage increases in capital inflows into bonds have been even larger. Emerging markets that have a high share of foreign ownership of their bonds and large current-account deficits will be most vulnerable to large capital outflows if and when monetary policies become less accommodating in advanced economies and interest rates start to rise.

and

Mexico experienced seven times the bond inflows between 2009 and 2012 as in 2005 to 2008, Turkey six times, Poland five times, and Brazil and Indonesia two times.

The image above shows how Turkey is close to a currency crisis compared to other developing economies. Other than proving fragility, the figures shown are 2012 data and we know that it is getting worse this year.

Time to learn the true meaning of the word “Insallah” for analysts covering Turkey, cause it seems like they are gonna hear this word from their Turkish colleagues too much in the not too far distant future.

Trend of Deposit Does Not Look Pretty

The recent trend of FX deposits does not look pretty at all as well as acts as reminiscent of 2001’s financial crisis in Turkey. The chart above shows the clear picture of both TRY and FX deposits are heading into. As demonstrated above, the terrifying spread emerged last summer, likely after the erosion of Turkish Lira due to capital inflows arising out of political unrest. A shocking move in foreign exchange rate supports the herd mentality as savers start to prefer the US Dollar or Euro rather than Turkish Lira. Eventually, this is turning to be vicious cycle where the Turkish Lira is the only loser.

Even if it is too early to speak artily of a currency crisis, the scenario I just explained what had been lived in painful memories 1994, 2000 and 2001. Therefore, this trend is alarming that everyone should keep an eye on.

According to Nomura, A Currency Crisis Is Not Too Far

Time after time, we saw striking warnings about Turkish economy in reports, published by many huge international institutions. Once for all, Nomura, position Turkey at a more risky place than it does Indonesia and Brazil (in other words BIITS).

Since the end of 2009, Nomura is publishing Global Emerging Markets Risk Index (GEMaRI) scores, which casts light on the underlying fragility of each emerging market. Frankly speaking, this index is not a actual indicator for investors’ choice which market to pull out of. Here’s the official definition of the GEMaRI.

GEMaRI calculates the risk of currency crises occurring in 35 emerging market economies over the following 12 months and assigns a score to each country. The index incorporates 16 specially selected and weighted indicators which are integral to accurately measuring the risk of a currency crisis in an emerging market economy.

According to this index, there are four big signs of an upcoming currency crisis;

a hike in the real interest rate of more than 2 percentage points over the quarter (absolutely no expected in Turkey),
a fall in FX reserves relative to short-term external debt (according to CBT data, this is getting real),
a current account deficit larger than 3.5% of GDP (Excluding the recession periods, this ratio was never lower than 3.5%, in no uncertain terms, we welcome this sign),
and a FX-to-imports ratio of less than 4.

Here is the list of the countries ranked by Nomura.

Depending upon Nomura’s methodology, Turkey is one of the most risky countries among emerging markets when it comes to speaking of a currency crisis.

It is hard to forecast how this strategy will work in future, as many investors just play a wafting game.