The ‘ghost hit wall’

We are told that the ‘ghost hit wall’ is the literal translation of the Mandarin Chinese expression for getting lost, going in a circle and not being able to escape. “The idea is that when traveling in remote areas, a person is obstructed by walls that ghosts have placed in front of them, thus forcing that person to wander in endless circles,” says Ni, a Chinese artist. “People also use this term to describe problems with no real solution.” Well, ‘ghosts’ can easily get disturbed by rising uncertainty under extreme duress for economic, social, political survival, can’t they? Under which conditions that ‘duress’ can be accepted by a court as an individual apology for misconduct is another matter, but under many circumstances problems don’t admit real solutions and at least we can adopt and accommodate that connotations of the ‘ghost hit wall.’ Rather than reiterating arguments pointing at structural pitfalls of a low technology-laden, highly indebted – like many other countries – economy systematically generating current account deficits (CAD), we ought to accept that some problems will always remain with us in the foreseeable future.

Solution to Turkey’s CAD problem

There is no real and persistent solution to Turkey’s CAD problem, for instance. We are, along with many an investment house, envisaging a deficit of c. 4.5% of GDP going forward. Estimates range from $37 billion to $42 billion for the years 2017-18. Even if one declares a structural reform program that seriously aims to curtail the deficit through various workable means, it would take years to achieve that completely, not to mention posting a current account surplus. Hence, we take it as a fact of life in the short run. On the other hand, both gold imports and exports boomed yearto-date and the foreign trade deficit is about 5% less than it appears to be if we exclude gold. Hence, the CAD is also smaller than it looks to be prima facie. I take it as $3335 billion for 2017, excluding gold. That said, a probably $200-210 billion would be needed to finance both debt and deficit in 2018, a sum that Turkey has never found wanting thus far. Could that be about to change?

TL depreciation outpace inflation

Now that the tensions between the US and Turkey have become apparent, the theme of the fragility of the lira has once again gained currency. Of course, it is fragile. Just how fragile it is given structural weaknesses can be measured by the following fact. The lira has depreciated more than inflation over the last nine years. Without further ado, let us look at the figures against the dollar. The argument to the effect that lira appreciation explained much of the wealth effect of the citizenry – real or notional, but wealth effect nonetheless – was widespread from 2003-08. Some analysts had a hard time accepting that bygones are bygones and the rumour continued to be spread for a couple of years more. From September 2008 to October 2017, average CPI inflation was 8.08% per annum whereas the lira has depreciated by 12.26% against the dollar. Obviously, over the last nine years lira depreciation has outpaced inflation by more than 4 percentage points per year. Comparisons with the euro will render similar results. There is no reason to think the lira will appreciate either against the euro or the dollar if we look at a three- to fiveyear window. This is not even the start of an analysis because it is a raw fact, and there are obvious reasons why this is so. Nonetheless, lira depreciation is not monotonic, and this is where technical or other analyses come to the fore. The lira stabilizes for only relatively short windows – as happened this year to some extent because money poured into the EMs and Turkey for seven consecutive months – before it suddenly looses value. In the last three years, the loss per annum is about 16.5%: two times annual average inflation, and more than what it has been over the longer run of nine years. What will happen now depends almost entirely on the Fed and ECB’s odds of successfully engineering a smooth transition to the tighter monetary policy regime in the advanced world, at any rate much more so than it will depend on political upheavals.

TL fragility revealed by visa crisis

Could the current US-Turkey tension continue and become permanent? Political wisdom and the history of the last two decades tell us it probably won’t. In July 2003, tensions had hit a peak after the arrest of Turkish soldiers by American forces in Iraq. Anyhow, there have always been ways to soften even flagrant contradictions in the past. Unless, the conflict is strategic and inherently unsolvable without a political realignment, its impact should be transitory. Yet it has revealed just how fragile the lira is.

Fragile, but why? This is neither a structural issue nor is it a rhetorical question. Why did it not benefit from the rally, and used up the ‘slack’ that was provided by the overshooting of yesteryear’s H2 more than it did? After all, although on average the lira depreciates more than inflation, there have been episodes of appreciation and depreciation. I think at any exchange rate that has been below 3.50, residents increased their foreign currency holdings; this is why 3.3885 proved to be the lowest point. Either because they are indebted in dollars or because they tend to think – rightly so – in the end switching to the dollar would deliver higher yields, residents accumulated dollar reserves. Because everybody is suspicious as to the magnitude of the negative impact on bank balance sheets, rising funding costs, and debt rollover ratios, households and firms alike use the relative appreciation peri-