Vulnerabilities in a topsy-turvy world
IEverything starts with an action, and effects will follow in its geogrpahy or time-period. You might have read, “The Remembrance of the Things Past” by famous French writer Marcel Proust (for the Turkish edition, see ‘Kayıp Zamanin İzinde’ from Yapi Kredi Yayinlari, translated by Roza Hakmen). The first book starts with a memory, which is inspired by the taste of a madeleine cake dipped in tea. The narrator remembers having a similar cake as a child with his relatives in Combray, France. In Turkey, the surging trade deficit figures remind me of 2011 and 2013, where Turkish economic statistics dipped sharply.
As economists from Bank of America Merill Lynch forecasted, higher oil prices would push the Turkish current account deficit wider in 2018 (to 5.5 percent of GDP) despite the slowdown in activity. What will this mean to the general public about the surging current account deficit? Let’s say it’s more like a pressure indicator that weather forecasters use in their models. When the pressure rises, a dramatic change might be triggered in other economic indicators. (As a side note, the Bank of England has begun issuing statements - since the Great Recession of 2008 - on its actions so clearly that a 13-year old can understand it). Again in Turkey’s case, the market watchers and financial media are obsessed with other things, like interest rate decisions, stock exchange indices, or currency depreciation. But the thing is when the meteorological office signals an alarm, everybody listens. In our case, when the figures were published, ringing alarm bells, all we did was watch.
For a specific example, let’s read the recent commentary of a well-connected Turkish econom- ic observer, Tim Ash of Bluebay Asset Management: “I have little faith in the independence of the CBRT and its keeping policy tight in the run-up to elections. The strategy will be to run an economy on hot to elections to ensure AK Party victory. This leaves Turkey vulnerable in the global rate tightening context. Typically, Turkish markets weaken in the run-up to elections: buy just before elections on the prospect of an Erdogan win and ride the ‘normalisation’ trade for a few months after. Still, there is the risk of a negative Halkbank ruling: the market could still be shocked by the announcement of a big fine even if we see good compliance.”