It’s interesting now reading various bank reports after the firing of Agbal, which appear to be trying to reverse engineer a scenario of how Turkey can manage thru the current crisis and somehow muddle thru with the new economy management team.
Partly I think this reflects surprise that Turkey survived the shock of Agbal’s departure, and its markets and banks are still standing. Some are now arguing that Turkish assets are again cheap and its worth investing again.
The constructive narrative goes something like this – Needs must, and Kavcioglu will realise that to keep Turkish markets from collapsing he will more or less keep to Agbal’s script. So no early policy easing, and the simplified monetary policy structure reintroduced by Agbal will be retained.
Another similar narrative I have just read is that the sell off this week has massively tightened financial conditions and that this will result in a big deflation of the economy, and the economy will now go into recession, and that will shrink the current account to fit, cause deflation and disinflation and I guess bring back portfolio inflows, anchoring the lira.
Am I living in a parallel world here?
I though Agbal was fired, and Kavcioglu hired, as Erdogan did not appreciate recent policy rate hikes and wanted looser, pro growth policies. Now the IMF, Fitch, et al in recent weeks have been revising up Turkish real GDP growth forecasts for this year, to 6-7%. That was under Agbal. Why would Erdogan fire Agbal who seemingly was going to deliver 6-7% real GDP growth, to then hire Kavcioglu to deliver recession?
I may well be an idiot, some of you might think that, but surely if growth begins to lag, Kavcioglu will deliver early rate cuts, and surely that will reverse any improvement in the current account, unanchor inflationary expectations, push dollarisation and capital flight. It will then crush the lira.
I still don’t get how Kavcioglu is going to cover a likely $75bn external financing gap with limited FX reserves, an inability to keep rates higher for longer, the desire to avoid harsh capital controls, no IMF and likely portfolio outflows and continued dollarisation.
It just does not add up
It feels like people are just reading the well known crisis management skills of Turkish central bankers and government officials, and imagining or reverse engineering this into some longer term strategy, or survival path.
Sure you can cripple the offshore swap market to stop investors shorting the lira, in order to stabilise the lira in the short term, but you lock existing investors in to losses, and you make future portfolio inflows less likely as you kill credibility in FX hedging instruments.
I was confused so I ran a few Twitter surveys this week, on my @tashecon account. The results were quite interesting.
First I asked why people thought Agbal was fired:
* 43% thought it was because RTE wanted lower rates;
* 25% because Agbal had wanted an inquiry over FX reserve losses under previous CBRT management:
* 9% thought some court conspiracy;
* 23% thought it just too difficult to fathom.
3,041 voted herein.
Second, I asked what Kavcioglu would do at the first MPC meeting on April 15, and the 4,207 replies broke down as:
* No change in rates – 45%;
* A cut of up to 200bps – 30%;
* A cut of over 200bps, 25%.
Finally, I asked, well assuming Kavcioglu does cut rates early, what will be the result:
* 47% expected a maxi devaluation:
* 22% expected the end game to be capital controls;
* 17% expected resort to the IMF;
* and only 14% thought a muddle thru scenario was possible.
Note the latter scenario seems to be what I am getting from most Turkey bank reports I am reading. I got 2,682 votes on the latter. So someone is wrong herein.
The history of unorthodox policy
Funny but I just went back and looked over the performance of unorthodox policy in recent years under different governors.
The Orthodox Durmus Yilmaz saw the lira weak by 13% during his five year term and that included the GFC so I would cut him lots of slack there. The monetary policy guru, Erdem Basci, who arguably let the beast of unorthodox policy out of the laboratory saw the lira weaken 46% during his five year term. His replacement Murat Cetinkaya saw the lira weaken by 49% over his three year or so stint at the CBRT, and where it was still pretty unorthodox settings.
Then Murat Uysal saw the lira weaken by 34% during his 16 months in office, again of unorthodoxy. Only Naci Agbal of governors post the GFC managed to bring TRY appreciation (an impressive 18% in his four months in office) – the others all ran a spectrum of unorthodoxy. I would argue the evidence is pretty convincing that in the Turkish context unorthodox monetary policies bring a weaker lira and higher inflation. The evidence seems pretty compelling. Note that the last CBRT governor to meet the central banks inflation target of 5% was Durmus Yilmaz, who still wins big plaudits from me, now followed by Nagi Agbal.
And guess the conclusions are that unless Kavcioglu is going to run orthodox monetary policy, without capital controls, and the IMF, something has to give, and it is likely to be the lira.
* Please note that any views expressed herein are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions. The views expressed do not reflect the opinions of all portfolio managers at BlueBay, or the views of the firm as a whole. In addition, these conclusions are speculative in nature, may not come to pass and are not intended to predict the future of any specific investment. No representation or warranty can be given with respect to the accuracy or completeness of the information.