Fed Taper – 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.

10y US Treasury As A Global Markets Driver

At the center of all financial markets, we have the market for US Treasury. US fixed income market play a crucial role in the global economy. Treasurys are denominated in US dollars, the main currency used by central banks and major financial institutions around the world. Because the US government owes so much and because investors expect the US government to honour its debts always, the Treasury market is considered the cornerstone of the global financial system.

If we stay focused on Turkish bonds markets, it is hard to regret that it moves in a similar way as US market does after seeing the chart below.

Well, ahead of FOMC meeting, the rumours are main dynamics and shaping the opinion of all global markets. What we saw previously in US bond market is that the Fed is frightened to death by a sharp rise in yields. It is rational to expect Turkish bond market to maintain the trust of marketplace for a few weeks more.

Goodbye BRICS, Welcome BIITS

The acronym for the association of five major emerging national economies, Brazil, Russia, India, China & South Africa, has been on of the most frequently used elements in the financial terminology for recent years. Now, the outlook for emerging economies is stabilizing due to approaching new-normal and evolving international monetary reform, as some authors of Bloomberg introduce us the BIITS (Brazil, India, Indonesia, Turkey & South Africa).

Changing global conditions are also altering the risk perception of the emerging markets, that remained remarkably strong through recent years. The end of zero interest rate policies of developed economies is getting closer day by day. The threat of diminished global liquidity had already sparked the biggest emerging-market currency sell-off in five years, with the Indian rupee and Turkish lira hitting record lows. As most economists advise emerging countries to adjust a lower growth rate and refocus their economies, investors also reassess the assets held in emerging markets.

The general opinion is that emerging markets are no longer blanket buys, especially the ones who may remain vulnerable following the monetary tightening in the developed economies. This time, we do not have an acronym for shining emerging markets but for fading ones and the five major emerging markets that may likely be risky in the near future are BIITS, according to Bloomberg.

Speaking about Turkey, current account deficit is the chronic disease of its economy and its tremendous foreign exchange requirement to finance this deficit is putting the economy at risk. The annual growth rate at the end of last year was 2.2%, as well as was good sign in the way of re-balancing. This humble growth also led the economy moving out of danger with decreasing CAD. However, 1Q13 results were simply unsatisfying; a 4.4% growth rate y-o-y and CAD up to $44 billion (this means a 25% increase in CAD).

It is not so far where investors will start to more choosy among emerging markets than they have been in the past and Turkey should be well-prepared to restrain the capital outflows.