According to Ozan Ozkural, managing partner of boutique investment firm Tanto Capital Partners, the unpredictability of Turkey’s fiscal and monetary policy means that investors need to be kept away until normality is restored.
Inflation is approaching 20% in a country with a population of about 85 million, prices of basic goods have skyrocketed, and salaries in local currencies have been significantly reduced.
Ozkral said Wednesday at CNBC’s Squawk Box Europe that the problem is not only easing anti-mainstream monetary policy that central banks around the world are trying to tighten, but it is being implemented. He said there is also a method.
“Investors, we are nothing more than unpredictable monetary and fiscal policies, which makes it very difficult to price Turkish assets and Turkish risks,” Ozkral said. increase.
“In this context, we can’t imagine investors coming to this country in the short term until this changes.”
Turkey’s President Recep Tayyip Erdogan defended the central bank’s continued easing of monetary policy. This is the approach he promoted to “lift this interest rate tragedy from people’s backs.”
The central bank has cut key policy rates by 300 basis points since September, free-falling currencies that have already fallen as investors flee from Turkish assets.
“Turkey is a big power, strategically very important, market dynamics, demographics work well and are very resilient to shocks,” said Ozkral, who said the Turkish economy has been in the past. He added that he has proven to be good at dealing with the crisis.
But he suggested that investing in Turkish assets now carries too many unknowns, even over a longer period of time.
“In this current situation, it is currently very difficult to make a long-term investment in the country until it shifts to a fundamentally credible reformist position within this government, or within the next government each time an election is held. “He said.
“But it does not undermine how important and important Turkey is to investors in the medium to long term.”
“Fundamental changes” to TCMB functionality
Lira has been trading around 3.5 Dollar From mid-2017 to Tuesday, 13.44, which was previously unthinkable. Much of this decline is underpinned by geopolitical tensions, significant current account deficits, increased debt, and reduced foreign exchange reserves, with strong opposition to Prime Minister Erdogan’s rate hike.
But in a research note on Tuesday, Goldman Sachs emphasized that “the cause of the current sale is different from the past.”
Goldman Sachs Associate Murat Unur and Economist Clements Graf said, “The current account deficit, a major vulnerability in 2020, is more than half that of last year. Recently, loans. Growth has accelerated to a limited extent, and the dollarization has recovered slightly. ” ..
Turkish President Recep Tayyip Erdogan spoke at a meeting with a businessman in Istanbul, Turkey, on January 15, 2021.
Presidential Press Office | Via Reuters
They also noted that portfolio flow, derivative exposures, and debt rollover rates have not changed significantly to this point.
“Therefore, we believe that the sold-out was mainly caused by the impact of rate cuts on local expectations and TRY demand.”
Unur and Graphene suggested that the latest rate cuts represent “a fundamental change in TCMB’s reaction function.”
“It can be argued that TCMB was overly dovish in the past (for example, a significant cut in 2020H1 and a delay in rate hikes in 2020H2), but especially at one time, domestic production and inflation demands it. It’s not entirely contrary to what it is, like when Lira is under great pressure and global financial conditions are tightening. “
“The increasing importance of expectations in promoting different TCMB reaction functions and asset prices is increasing the difficulty of forecasting over the coming months.”
Turkey’s uncertainty leaves little appeal to investors, according to strategists.
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