EMRE DELİVELİ > Quantitative easing III: Boon or bane for Turkey?

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It has been exactly two months since the Federal Reserve (Fed) announced its third round of quantitative easing, dubbed QE3.

Under the program, the Fed has agreed to purchase $40 billion a month in mortgage-backed securities while pledging to keep policy rates extremely low until at least mid-2015. I would argue that the very strong flows to emerging markets since then are due to the latter, as the ultra-low interest rates for the foreseeable future have investors chasing yields elsewhere.

Turkey has been one of the main recipients of these flows. Of course, rumors of an upgrade to investment grade, which finally materialized last week, played a role as well, especially for equities. But even a perennial pessimist like me has to accept that Turkey looks better than many of its peers.

Such flows are both a boon and bane for Turkey. On one hand, the Turkish growth model is reliant on external financing, so the economy will expand as long as the money keeps rolling in. But on the other hand, this model exposes it to shifts in global financial conditions. If there were to be a sudden stop to capital flows, the country could end up with an exchange rate depreciation and recession.

In fact, at the credit rating agency’s packed Turkey Credit Outlook Conference in Istanbul on Thursday, Fitch analyst Ed Parker underlined that such a scenario is likely. However, they decided to go with the upgrade anyway, as they believe there are “buffers against a full blown financial/sovereign crisis,” such as “strong government, bank and household balance sheets, economic flexibility and monetary and exchange rate flexibility.”

I am not so sure. For one thing, a casual look at this and last year’s Medium-Term Programs reveals that the fiscal slippage this year will carry on to next year. Besides, the government does not have a good track record of sticking to its expenditure targets, so I am not taking next year’s budget deficit objective of 2.2 percent too seriously, especially as there are local and presidential elections in 2014 and general elections the following year.

I feel that Fitch’s fiscal view gives a lot of importance to “stocks,” such as the country’s low debt levels, and not enough weight to “flows,” such as the worsening deficit. The same goes for household balances: While Turkish households are not indebted compared to their peers, their debt levels have nevertheless risen very fast during the last few years.

And I am not sure a flexible exchange rate would help against the huge corporate open position. I asked Central Bank Deputy Governor Turalay Kenç, one of the speakers at the Fitch conference, if the Bank is not worried about this anymore. He mentioned that most of the open positions belonged to exporters, who have a natural hedge.

Nevertheless, investors I spoke to in London last week mentioned a strong U.S. recovery and rising interest rates, which would put a stop to capital flows to Turkey, as the biggest risks facing the country.


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Emre Deliveli

11/13/2012 3:58:26 PM

DKI: Those structural reforms are of course vital. Fr Grey: Corporates have a currency mismatch- more FX liabilities than assets, as shown in the last graph. Mr. Kenc is saying this isn't a big deal, as these are mostly exporters earning FX. I don't agree with him (on the big deal part), as I will in my blog later today: http://www.economonitor.com/emredeliveli/


11/13/2012 3:35:22 AM

The American dollar is worthless, no one wants to trade with it. But they are forced to. U.S hold a monopoly over the whole world, forcing countries to trade with their worthless currency. Especially when it comes to oil, and this is the real reason they have a problem with Iran. And had with Lybia and Iraq till they got rid of the opposing leaders. QE4 will be just around the corner... let's wait and see! Turkey is following a little too close in the footsteps of America for my liking.

Fr Grey

11/12/2012 10:27:05 PM

Dear Emre Deliveli, in sentence "most of the open positions belonged to exporters, who have a natural hedge", by "open position", do you mean that the exporters hold call or put options of TL, or long or short the future of TL? In short, those exporters are afraid of the rise or drop of TL ? Please clarify.

dogan kemal ileri

11/12/2012 4:12:01 AM

Firstly,Turkiye's levels of bureaucracy are totally counterproductive in this global world and must be eliminated.Secondly,income distribution is still very unjust despite the introduction of the minimum wage.We must overhaul Turkiye's very complex tax regime and tax the earners instead of low income recipients.We must start a war on Corruption and nepotism.Radically improve the education and quality of our workforce and finally ensure the rule of law is paramount to enhance business confidence
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