Reuters analysis: ‘The first messages from the economic management were not considered satisfactory’

Recent events have raised concerns among some investors about practices other than capital control or free market rules, which were put on the agenda from time to time but were never implemented during the AKP period.

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As the difficult and newly won credibility left its place in the Central Bank (BC) with question marks after the change of president, TL suffered a historical depreciation close to double digits against the dollar, and the first messages of the management economic to alleviate the crisis. market did not satisfy investors.

Measures such as capital controls have been talked about many times in recent years, but they have been repeatedly rejected and never implemented. In remarks made today, AKP’s Nurettin Canikli pointed out that “the free market mechanism will not be abandoned” and defined the liberalization of capital movements as the “red line”.

President Tayyip Erdoğan replaced Naci Ağbal, who raised the interest rate by 875 basis points in less than five months while in office, and appointed Professor Doctor Şahap Kavcıoğlu, who criticized the high interest rate like him. The firing came just two days after a 200 basis point rate hike, which was higher than expected.

The dollar / TL, which yesterday rose to 8.4850 on the ilikit market, started the day around 8.05. The dollar / TL, which fell back to 7.7 during the day, then rose again to 8.

The pair was trading at 7.8600 / 7.8700 at 4:36 PM. The depreciation of the LT against the dollar was yesterday at the 9 percent level, after exceeding 16 percent in the ilikit market. USD / TL was at the 7.2185 level in the last trading on Friday before the decision.

At the same time, at the EUR / TL 9.3691 / 9.3814 level, on a basket basis at TL 8.6144 / 5.6259. TL fluctuates with a loss of around 10 percent in euros and baskets.

First messages

Kavcıoğlu and Elvan also drew attention to the “permanent decrease in inflation” objective in their first remarks after the pressure on sales. Elvan also said: “There will be absolutely no concessions from the free market mechanism and the implementation of the liberal exchange rate regime will continue with determination.”

Kavcıoğlu, with his first statement, addressed market concerns that an interest rate cut could be made before the routine April 15 date. The next decision of the MB MPC is April 15th.

Bankers said over the weekend that the first announcement from Kavcıoğlu was expected to understand whether an interest rate cut with a PPK would be made before this date.

How will the lost confidence be achieved?

Morgan Stanley noted that Ağbal, who was fired in a note published yesterday, has implemented a tight monetary policy, “Even if the (tight) policy continues, we expect a weaker TL and higher inflation. “(Policies) If it reverses (in TL), we expect an even bigger move,” he said.

In the Bank Of America note, it was noted that reserves have increased by more than $ 10 billion recently: “However, when swaps with local banks and international central banks are excluded, the gross reserve of the MB is only $ 29.4 billion and its net reserves are pretty negative, with less than $ 51.3 billion in one region. “

Societe Generale, Turkey, “a point of no return”, noting that it brought the dollar / TL forecast until the end of the second quarter will rise to 9.70. “We advise closing all long positions in Turkish assets, in view of the drastic change in policy formulation and the possibility of impending financial turmoil,” the bank’s analyst said in a note.

In the Goldman Sachs report, Kavcıoğlu’s articles in the Yenişafak newspaper were noted: “Taking into account the opinions in favor of relaxation, we see the risk of making the rate cuts we expected in the last quarter of the year much more anticipated “.

Developments such as the expectation that the increase in inflation will continue, the depreciation of the LT will create a further increase in inflation, the low level of reserves, the damage to investor confidence, the opening of a closing case against the HDP at a time when economic and legal reforms, and the departure of the Istanbul Convention are mentioned, go out a very difficult path unless the economy of Turkey is taken over. The prominent theme in analyst opinions is “confidence.”

Whether there will be a cabinet review in the markets is also a topic to follow to understand what kind of understanding there will be in economic policies.

Concern for hostile footsteps persists

Although the government clearly says otherwise, analysts worry that sooner or later unfriendly measures will be taken, and this is reflected in their opinions and suggestions from clients.

Some of the main concerns include restrictions on swap transactions, foreign exchange intervention by state banks through the sale of foreign exchange, and even capital control. These expectations are not the same among all analysts, but the consensus is that even with the continuation of current policies, shortage of supply of foreign exchange may occur and a market-friendly approach on how to hedge it has not yet been proposed.

Goldman Sachs says that an “immediate adjustment” in the current account balance may be necessary, as it is increasingly unlikely that the inflow of money will pay the debt of the markets. The bank estimates that as pressure on the TL increases, currency interventions can be seen again.

The small number of institutions, including the SEB, say that Turkey is well placed at the bottom of the fixed exchange rate and generates additional taxes on profits domestically, such as capital controls that could force residents to levy taxes on the purchase of foreign currency.

Some investors also claim that if policy interest rates fall rapidly from their current level of 19 percent, regulatory agencies can take steps such as re-limiting banks’ swap transactions to reduce money outflow.

TL has experienced double-digit depreciation twice in a single day in the last 20 years. One was recorded at 15.1 percent in August 2018, and one is seen today.

Timothy Ash of Bluebay Asset Management commented on TL’s double-digit loss against the dollar as “the cost of Ağbal’s firing.”

BIST 100 and bank indices traded at 4:39 pm with a loss of 10 percent, while the benchmark 10-year bond yielded 19.27 percent, up nearly 550 basis points. The last transaction on Friday was 14.06%. The CDS rose from around 300 basis points to the 462/482 level.

Third since July 2019

While the shakeup surprisingly took place around Saturday morning, Erdogan, known for his low willingness to interest, fired an MB president for the third time since July 2019.

The Capital Economics report said: “The period of fighting inflation may be over, once again it is a real possibility of facing a balance of payments crisis.”

‘He did not use the tools rationally’

While there was no official explanation as to why Ağbal was fired, the first comment on the matter came from Canikli.

Canikli said: “It is not a challenge for the markets that the government changes the head of the Central Bank, which he believes is not using the monetary policy tools rationally to determine the optimal positive real interest level and therefore imposes a huge financial burden on the economy. “

During the five months that Ağbal was in office, there was a portfolio inflow of approximately $ 4.8 billion, mainly in the bond market. When the swap market is included, foreign inflows exceed $ 20 billion. The market is closely monitored by how much and at what speed foreign transactions will decline.

Despite such an influx of foreigners, the share of bonds increased from 3% to 6%, but it is far from the 20-25% levels of a few years ago.

In the same period, domestic bank clients, who were not as optimistic as foreign ones, are seeing their gold and foreign currency deposits approach their all-time peak.

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