Flash in the pan

Flash in the pan

Turkish markets have been interesting to watch lately. I see a kind of serenity in them, if not optimism in the last two or three days. Why is that so? Any change in the fundamentals? I don’t think so. Growth still seems to be faring down to 1.5 to 2 percent with the current account deficit around 6 percent.

January saw a fund outflow, while the country needs a monthly inflow of around $5-6 billion at least; nothing good on that front. There is also no change in the U.S. Federal Reserve’s tapering process as far as I can see. Then are we expecting all this hurly burly in Turkish politics to be gone with a Justice and Development Party (AKP) win in the local elections? No. With both Twitter and YouTube closed down to Turkish citizens, the country sorely needs a new story. We have three elections within the space of one year, starting from this Sunday, March 30. It’s going to be a bumpy ride. Are there any remedies taking shape to calm the markets? No, not yet. So why do Turkish markets look so calm?

It might be because of a series of individually tiring events that are coming one after the other. It might be a function of human nature. We all have become a nation of eavesdroppers lately, eagerly tuning in to new wiretapping episodes of our leaders every night. You might say that is a bad development, but people need some type of disclosure; they need to know how they have been governed over the past couple of years. Traders are also human beings and they follow revelation after revelation with awe.

It’s a tiring business, like a gripping TV drama that distracts you from work. Could it be this aspect leading to relative calm? “Come on,” you might say, “Turkey is an open country; there are also foreign portfolio players. If Turks are tired, there are others to take the lead.” You would be right.

The Central Bank of Turkey could decide to pay interest on reserve requirements, which states that banks have to set aside a precautionary 10 percent of their deposits and notes. The requirement itself is bad for banks because it increases their funding costs, but paying no interest on this amount is equally bad. Lowering the costs of the banking system could allow it to restructure its own loan portfolio. Why is this important? With the steep decline in the rate of growth of the loan portfolio lately, there will be commercial loans that need to be restructured. If you are going to restructure, better do it early and control the damage. That is good for a bank’s balance sheet. Turkey did that at an early stage, just when the global financial crisis broke in 2008. Now we are trying to repeat the old experiment once more. The conditions are not similar, but there is no other alternative. So lowering funding costs is a first step in the right direction. This appears to be a better reason for serenity in Turkish markets.

I have to add another chord here. If the Central Bank is indeed paying interest on bank reserve requirements in order to allow markets to restructure their loans, then more measures are needed to complete the cycle. The Banking Regulatory Agency also needs to intervene. All this, after all, might be the reason for the relative calm: A systematic regulatory intervention strengthening the banking system to counter the crisis in Turkey’s leadership. Good news.

But I still see this calm as a flash in the pan. Turkey needs a new political story now and that story with the same old characters is hard to be convincing.