Could be an Intervention…

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Turkish interest rate and monetary policy unorthodoxy together conjure another layer of risk premia for the Turkish economy and financial assets. If allowed to metastasize, market and resident negative reaction to this unorthodoxy could entail substantial event risk, challenging local stability and inviting some form of civic intervention.

We’ve all probably been there, we’ve all more likely heard stories and experiences related about it. Maybe it’s something we have experienced directly, or maybe it’s been something that has beset a family member or friend. We’ve at least seen it dramatized say on Netflix or some other streaming source. I’m talking about intervention, about the need for a timely intervention. And you know, it’s often around the holiday season that these things come to bear as well.

The intervention I’m talking about is not necessarily an emotionally laden one, or one addressing substance abuse issues, for example. The intervention I’m talking about has a more civic-social aspect to it, but like other forms of intervention, it may attempt to correct a departure from reality.

So, in some living room or sitting room of the mind, concerned friends and family are gathering, being now seated in a warm supportive semi-circle. They confront the afflicted with the reality, the hard reality of the problem:

President Erdogan, actually, let’s be informal here, we love you, man. Recep, interest rates do not cause inflation. They just don’t.

(There would be heads nodding, supportive murmuring.)

However painful it might be, however wrenching it might be – and I know this is hard, you have to allow for a more orthodox policy approach that allows for true price and interest rate discovery, and a more rational allocation of resources. Only in that way, can you have the organically growing, reasonably stable and prosperous economy you want…

And, so the above imagined dialogue would go…And it does highlight a real problem: bad economic policy is confounding, and is undermining local confidence in local currency value and in the domestic economy in Turkey.

As local confidence continues to diminish, there is a risk that many aspects of civic stability could also go with it.

Since November and the dismissal by the Erdogan government of a more orthodox finance minister, resident confidence and the Turkish lira’s exchange rate value have become increasingly brittle. According to Trading Economics, Turkish domestic inflation will be posting at an annual rate of over 31% as of the fourth quarter of this year – this is not characteristic behavior of an aspiring European Union (EU) member.

And make no mistake, Turkey is a large society with a sophisticated, diversified economy and an aspiring citizenry. The country’s economy produces a broad variety of goods and services, among which include sophisticated (and affordable) and geopolitically ramifying military drone technology – which we have alluded to in other entries.

But, the personalized leadership of the Erdogan government has refused to budge on this point, on the point of acknowledging economic orthodoxy and reality, and continues to view market-driven or corrective interest rates as anathema.

The current government has attempted in fact to side-step the issue of fundamental currency value by introducing compensatory measures for local currency holders. Measures have been put in place to index local lira deposits against inflation and/or lira devaluation effects.

Similar measures by other governments in other places have been tried before. They were met with mixed results. The Tequila Crisis-era Ajustabonos and Tesobonos come to mind. Prior to the 1993-1994 scrapping of the crawling peg devaluation and the massive devaluation of the Mexican peso, the authorities there enacted the above cited securities to compensate peso asset holders against effects from inflation or loss of local currency value. When any government implements such measures, that government implicitly questions the confidence domestic residents should have in the local currency and in the stability of the local credit environment. It is very much a bad move.

And so, we wait. What will happen? Might the Erdogan government recast its opinion on things? Or could economic forces meld in such a way to be self-adjusting and mild? Could local confidence receive some otherwise unanticipated favorable “shot in the arm”? Hard to say, that is for the investor – both domestic and foreign – to decide.

What we will say is that broken domestic confidence can mean broken local currency value – and such a break means compromised price stability and uncertain local asset values. That means – for residents – much more stringent, compromised and limited local circumstances. And that means much more widespread dissatisfaction on how things are going and much greater uncertainty over what to do next, which means instability.

Turkey as a nation and society has had an unfortunate history of stability being renewed and administered from the barracks. The news agency Al Jazeera has rendered a chronicle of military interventions over modern Turkish history since 1960. There have been a number of them.

Formerly, this Turkish military had been established as a kind of cornerstone for the Kemalist version of the Turkish state, one emphasizing secularism and the adoption of modernity. The ruling AKP (Justice and Development Party) led by President Erdogan had been able to thwart an attempted military coup of a few years ago. And one can be assured that the military was vetted thoroughly regarding loyalty to the current regime. That said, military intervention has historically been in the offing, when too much uncertainty or instability looms. One can say that the expression, “it’s important to get the currency right”, is extremely rich in meaning these days.

We wish a Happy New Year and a wonderful 2022 to all of our clients and readers!

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