Announcing the Medium Term Program will not fix the market problem

Announcing the Medium Term Program will not fix the market problem

Presidential spokesperson İbrahim Kalın has announced economy was on the table in the first cabinet meeting of the new period and that the Medium Term Program would be announced in a few weeks.

The government, it seems, expects the markets to cool down by announcing the Medium Term Program. However, that is not possible.

Right after Kalın’s announcement, the international credit rating agency Fitch announced that it has downed Turkey’s credit note and that it has changed the outlook on Turkey to negative. Looking at the recently rising currency rates and the latest cabinet announcement, I guess Fitch’s moves were expected.

It is now a matter of curiosity whether Fitch will follow Moody’s and Standard & Poor’s in the coming days.

The markets may have bought part of this downgrade, but today the markets could start the week off on the wrong foot.

In 2017, the Medium Term Program was announced in September, and was received with criticism for being unrealistic. Kalın, it seems, expected the markets to cool down by announcing the program early.

Let’s put aside whether the medium term goals are realistic or not. What the markets are waiting for is not this—it is something else.

Especially in markets abroad, there is a great sense of insecurity. It seems this insecurity has not been eased by the results of the snap elections. It has even worsened.

Having a glance at Fitch’s announcement could be sufficient in seeing a reflection of the markets’ response to the current picture.

Fitch has announced that it has taken a couple of issues into consideration before making its move public:

“The economic politics agenda post-elections, inflation and fiscal policies, the outlook on structural reforms, and the independence of the Central Bank.”

Fitch has said an independence in cash politics and a tolerance for decreasing economic growth.

“Expectations regarding these and the structural reforms remain vague,” it said.

Turkey stands vulnerable to shocks due to its foreign capital needs, the announcement stated.

All in all, investors feel uneasy about the independence of the Central Bank and the freewill regarding a decrease in economic growth. With the current trend, the markets, meaning the investors, are afraid current problems could worsen.

The currency assumption in the Medium Term Program

So, the announcement of Medium Term Programs could by no means calm markets.

The markets also know that raising interest rates is not the solution, yet it wants the Central Bank to show it is independent of the political authority.

To be honest, it is uncertain whether markets would wait until the routine meeting on July 24 for a declaration of independence.

Markets are not interested in objectives or other such announcements per se. They want to see solid steps taken.

What would you say these are?

The postponing of investments, especially large, symbolic, infrastructure investments, the concretization of serious precautious measures, and decisions by the Central Bank to reinforce independent institutions could be a signal in the right direction.

This is clear: Trust has been lost and it will be very difficult to regain it.

Now, let’s come to the reliability of the Medium Term Program’s objectives. It might be enough to say the Medium Term Program does not include the currency goals or predictions but calculations are made on designated currencies.

In 2017, the Medium Term Program’s United States dollar prediction for late 2017 stood at $3.17 for a single Turkish Lira. For 2018, it predicted the dollar would stand around 3.82. For 2019, the prediction said the dollar would be worth 4.01 Turkish Liras. For 2020, the prediction foresees the dollar would be worth 4.03 liras.

By mid-2018, the dollar stood at 4.85 against the lira.

Is it possible to maintain a macro balance based on these predictions?

It is obvious the Medium Term Program’s announcement will not have any effects. Much more radical and solid precautions must be thought of.

Erdal Sağlam, Turkish economy, Medium-Term Economic Program