Geostorm Mark 1 or is it pure Gimmickry?
Every gimmick of the ad-man has been put to use. In fact, at times like these, bravura is quickly wearing thin because the paucity of the language doesn’t allow it to carry the day, and furthermore, political conjectures don’t come about with convincing evidence in this part of the world. In wartorn countries like Syria, political veracities may not readily surface even after decades. As such, Syria has become the playground of power-laden old-school politicians. It is proxy war on a global scale. Otherwise, we should boil down to the old argument that the riches – extant or yet unexplored resources, in this case natural gas - of the country is what really matters. I don’t know but I find it hard to believe that unless there exists a direct economic-cum-strategic benefit, a war can go on for so long. The rubber of Cameroon in the late 19th Century is, for instance, what explained the “Kautschuk-Expedition nach Westafrika.” Still, whatever the reasons are or were, the political landscape has now been so intertwined with long-standing ideological and political fixations that the country seems to be entangled in a cobweb for good. I don’t know if waiting on the side-lines is a good strategy for anyone, but it seems like the Mark 1 phase may pass without further ado because Russian forces have not been targeted directly, and they were informed before the attack. Anyway, the lira was already hit days before the missiles had been launched, and I gather that the traders’ safe bet position vis-à-vis the TRY was already clear in March.
It is a fragile currency, yes. Let’s look at the exchange rate graphics. Data start at the onset of the ‘taper tantrum’ of 2013. Consider the last 5 years from mid-April 1013 to mid-April 2018. The compound annual depreciation of the lira stands at 17.73 percent. The Russian Rouble showcased a 12.96 percent depreciation, and the Brazilian Real 11.04 percent over the same time span. Only against the Rouble did the TRY look stronger and this was before December 2016. The real effective exchange rate index tells the same story. What we see is the highest real exchange rate depreciation rate in a basket of 50 countries. Again, we can easily observe that central bank reserves were at the latest peak in August 2014 with around $114 billion (excluding gold) and $135.5 billion (including gold). The current figures are $83 billion and $108.4 billion respectively. Reserve depletion amounts to $31 billion (excluding gold) and USD $27 billion (including gold) in the last 44 months. No wonder the lira has been fragile, and still is.
What is awkward is how each and every time the Lira loses value, the outcome is treated as if it were a surprise. True, after Lehman there were episodes of lira strength – stability at least - and depreciations were sporadic. Nevertheless, every time the TRY was hit it reached a new plateau. The memory of the old days of lira appreciation was still fresh, and people couldn’t just believe that the TRY was set to depreciate going forward. However, after 2013 this trend has become so obvious that one should wonder why dollarization has not become a widespread phenomenon.
The latest wave is obviously an observable, forecastable and measurable one. Because the latest Syrian affair, i.e. the launching of missiles and what not, was predictable and in the shelves since January, traders could easily have opted for the one safe strategy, i.e. selling TRY off. If we look at the Turkish CDS we observe that most of the upward movement came in the last three weeks. True, there are fundamental reasons, but the last shock is largely a conjunctural one. We will possibly see similar waves ahead, depending on both the electoral cycle and geopolitical developments in the region. Trump’s policies will not help because the tariffs will have a bearing on Turkish exports to the U.S., but unless the EU will spread it to its own imports, and with the help of the Euro/USD exchange rate’s current level, Europe will continue to be Turkey’s main trade partner. Note that the real sector, although repatriating some of its previous earnings in February – we may see a similar effect when the April numbers are released - was also able to borrow a net $1.9 billion in February. I have started the year with a ‘two percentage points above inflation depreciation’ target and predicted 4.30 against the USD by the year end. I stick to that.
Is a rate increase probable this month? Well, it is in the cards, and a limited tightening via the late liquidity window shouldn’t be entirely discounted. Nonetheless, it may only convey a message. The true argument lies in the expected real interest rate. At 4.12 percent the ex ante real rate should be sufficient normally, with a slight margin left above that perhaps, but as the exchange rate deprecia-
tion becomes the “new normal” so to speak, and as oil prices remain relatively high, inflation tends to become sticky. This brings the realism of the expected real interest rate into question, and if the ex post real rate falls clearly short of the estimated 4 percent current expected rate, then yes, a rate hike will be warranted. Again, it is fine-tuning because a steep rise would stifle the economy in an environment of already high – and rising - rates. Furthermore, it would put pressure on the current account because money may pour in and imports may go up even more. Already the contribution of net exports is in jeopardy for the bulk of 2018. True, Q1 will post a very strong GDP print, probably above 7 percent, but what about the rest of the year? On account of the observation that the last depreciation is a bit “traders’ extreme make-over” and assuming that tensions will ease for a few months in Syria, I still think any rate hike can only be a signal-bearing act, not a truly warranted move against risks and against “over-heating” as such. Genuine over-heating is dependent on the timing of elections.
Why is that so, and why do I think ‘over-heating’ can be a feature of the near future, but that the economy has not entirely over-heated yet? First, the above 7 percent expected GDP growth of Q1 2018 is basically a momentum phenomenon. There is also a visible slow down and Q2, let alone Q3 with a huge negative base effect awaiting, will be lower than last year’s Q2, and markedly lower than Q1. Second, the real estate sector is dragging down both the consumer and the investor, and unless mortgage rates fall – which is very unlikely - it can’t resurge save a huge collapse in prices that will clear accumulated excess supply. Third, the existence of a Turkish electoral business cycle is already a foregone conclusion, and it will not be different this time ei- ther. Public spending is largely rewarded by the median voter here. The median voter doesn’t care much about inflation, not about future taxes nor future administrative price increases. She only looks as far back one year, no more, and assesses her economic situation. Even inflationary surprises came to reward incumbent parties if they were accompanied by employment and demand increases. What voters look at most among financial variates is the exchange rate. Stabilize the exchange rate, albeit for a short period, spend a lot, and if you can also provide credit through public banks, you will have an edge. Because the electorate is sharply split along ideological lines also, what happens is only a shift at the 10 percent margin whereby voters temporarily migrate to the closest substitute, an ideologically neighbouring party that stands a chance of passing the 10 percent threshold. However, even a 5 percent migration can change a lot of things, so no incumbent party can miss the opportunity of triggering a ‘political business cycle’. At that point we will see what over-heating is and what is not (over-heating).
Could the Syrian entanglement bring about a global – or even local - financial and economic “tail risk”? We can’t dismiss the possibility with a sleight of hand. However, what it is exactly and how it can be resolved without triggering military exchanges between global powers is an open question. On the one hand, it ought to be commonplace that, say, Great Britain during the nineteenth century achieved the status of hegemonic power overseas by means of “informal empire” as much as by its fleet and by acquiring dominion in the strict constitutional sense in many parts of the world. From a purely economic vantage point, it isn’t even clear that any “formal empire” was indeed profitable. Nevertheless, almost all imperial history has been written on the assumption that the empire of formal dominion is historically comprehensible in itself and can be cut out of its context in British expansion and world politics. If «imperium» means “formal empire” only, the conventional interpretation of the nineteenth-century empire would still be on very shaky grounds. One way or another, “informal empires” will be needed to restore stability in the end, even in Syria. A heavy-handed approach wouldn’t do it. How so?
The term “imperialism” was coined in the late 1890s during the Boer Wars by the British press. It was meant to designate the greed and the aggressiveness of the Afrikaners – ‘blood diamonds’ aren’t they, white folks descending from the early Dutch colonists, whereas of course in London every decent gentleman sipping his afternoon tea while browsing the latest newspapers couldn’t doubt that the Brits were in South Africa for humanitarian reasons only. Aside from political fun, the term would have withered away had it not been for the very good book of Hobson published in 1902. Then, the term “imperialism’ became academic. It didn’t mean only that there was an empire, because empires have always been built somewhere and ordinarily existed for centuries. Rather, it implied new forms of making profit out of colonies. Lenin put it to political use some 15 years later, combining – rather not entirely successfully in my opinion - Hobson’s imperialism with Hilferding ’s finance capital. It was a timely political intervention though because WWI was still ravaging Europe, Russia and the Middle East. Lenin claimed that imperialism was capitalism at its highest and last stage, a new phase of capitalism combining financial capital with physical capital, becoming monopolistic and parasitic –inefficient, displaying an ever-increasing tendency for warmongering in the search for new markets where it could both sell goods and export capital. Well, it looked a rather well-established fact for many decades, because history has not passed unnoticed the occurrence of a WW II, right! In the longer run, the debate is still open.