Reliance on the ever-shifting sentiments of investors
If there ever was a way for the Central Bank to save face, it was certainly taken yesterday. Keeping the one-week repo rate (the benchmark rate) unchanged at 5.75 percent while hiking the overnight lending rate (the rate at which banks borrow from the Central Bank’s overnight facilities) by a massive 3.5 percentage points looks like a face-saving operation indeed.
“At first glance, the resolution seems aimed at deterring short-term local speculators who borrowed on [overnight] funds and bought dollars, betting on sustained lira weakness,” said Cristian Maggio of TD Securities, one of the few analysts who predicted things could change on the overnight rate front. “Raising the cost of funding could effectively reduce the incentive to shorting the lira against the dollar,” he added, explaining the rationale of Gov. Erdem Başçı.
What we witnessed on the currency front obviously necessitated doing something, with the Turkish Lira losing nearly 9 percent against the greenback since Aug. 1, despite frantic dollar-selling.
Another face-saver comes with the latest foreign exchange reserve data, released yesterday. The Central Bank has announced its gross reserves rose by $748 million to nearly $85.9 billion as of Oct. 14. This is a positive surprise, but does not cover the latest interventions. Plus, it cannot conceal that selling nearly $8 billion since Aug. 5 did not prop the lira up one bit.
Meanwhile, fresh data shows a global tide of short-term capital that continues to seek safe haven. BNY Mellon’s latest weekly data show that the Korean won, the Hong Kong dollar and the Indonesian rupiah are favored, while on the equity front investors have opted for South Korea, Hong Kong and Singapore. Regarding fixed income, Latin America seems to be a rising star.
Sadly, Turkey happens to fall into the wrong basket, whatever its fundamentals are. “Eastern Europe, Middle East, and Africa (EEMEA) bond funds experienced no recovery in net inflows since early 2009,” says an Oct. 17 analysis by RBC Capital Markets. “This highlights the clear structural shift of investors favoring a shift in exposure.”
Societe Generale’s Guillaume Salomon witnessed the shift on the ground, talking with a group of real money investors and around a dozen hedge funds during a recent visit to New York.
“They are concerned that the Central Bank might not be able to carry on doing this [currency operation] for a very long time,” the analyst told me earlier this week. “They are also worried about inflationary developments [pointing toward] the large holdings of government bonds by non-residents.” As I understand, the individuals Salomon listened to represented a substantial money pool, more than tens of billions of dollars. “I think the dominant view amongst foreign investors is one of nervousness over the current policy mix,” says Timothy Ash, respected economist at the Royal Bank of Scotland. “The huge external financing gap leaves Turkey very exposed to a tightening in global liquidity conditions.”
An economic model that depends on short-term foreign capital inflows has been the main structural problem, but the 2012 draft budget does not change this a bit. On the contrary, it essentially is a repeat of our twisted industrialization model that prioritizes foreign capital inflows instead of a struggle against unemployment and raising domestic savings. But let’s discuss the budget next week.