According to Ozan Ozkural, managing partner of boutique investment firm Tanto Capital Partners, the unpredictability of Turkey’s fiscal and monetary policy means investors should stay away until normalcy restoring.
This week the country’s central bank, the TCMB, maintained interest rate cuts despite rising double-digit inflation. Hence, the Turkish lira fell to previously unfathomable record lows. In around 85 million people, inflation is approaching 20%, which means that essential goods prices have increased. In contrast, salaries in the local currency have devalued significantly. Ozkural said the problem was not just the contrarian loosening of monetary policy as central banks worldwide look to tighten. However, he also mentioned the method it complemented.
Nothing irritates us as investors more than erratic monetary and fiscal policy. As a result, Turkish assets and Turkish risk are becoming increasingly difficult to value,” Ozkural said.
It is challenging to invest long-term in the country in the current climate until we shift to a fundamentally credible reformist stance within this government or the next one whenever elections occur. However, this does not diminish how significant Turkey will be for investors in the medium to long term.
For several years, the lira has been falling from around 3.5 to the dollar in mid-2017. It fell to a previously unthinkable 13.44 on Tuesday. Geopolitical tensions, a large current account deficit, mounting debts, and shrinking currency reserves contributed to the decline. They were exacerbated by Erdogan’s vehement opposition to interest rate hikes.
However, Goldman Sachs noted in a research note released on Tuesday that the causes of the current sell-off differ from previous sell-offs.
They also stated that portfolio flows, derivative exposures, and debt rollover rates had not changed significantly up to this point. The recent rate cuts represent a fundamental shift in the reaction function of the TCMB. Over the next few months, forecasting will be more difficult due to a different TCMB reaction function and the increased importance of expectations in driving asset prices.
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