Waiting for Godot

► Unless there is a sea-changing, unexpected event in the coming months, dollarization will continue and the Lira won’t become stable this year or the next. The fact that business activity endures under such a thick cloud of uncertainty is in itself remarkable.

► While one should admire the strength of the business sector, dispelling the clouds with the current macroeconomic policy mix is impossible. Hence, either billions of dollars will miraculously come from somewhere or our business community will continue to operate under duress with very little visibility.

► First, supply chains falter anew as the Ukraine crisis and raw material shortages begin to take a toll. Secondly, cost-push inf lationary pressures are being felt more and more because supply bottlenecks are adding to inf lation as well. Coupled with the recent currency weakness, I expect yet another quick passthrough to producer prices via a route that raises input prices without any reference to the rate of interest.

► We should note that the ‘fair value’ of the Lira is higher than its current level. Whether it is 16.5 against USD (or even higher) isn’t the core of the argument. Even after a huge depreciation the Lira is still above its fair value because inf lation is incredibly high.

► The inflation difference between Turkey and its trading partners is so huge that the ‘fair value’ of the Lira depreciates day by day. February international trade data revealed that the idea that an export-based recovery would generate much-needed hard currencies is fast becoming an illusion.

► Shanghai went under lockdown and travel restrictions have been applied. Hong Kong has also declared a quarantine. Oil prices might stay relatively low for a short period of time but “low” still means above USD 100/barrel – and lockdowns don’t portend good things for this price movement.

► Thirdly, although the outbreak of Covid-19 seems to be fading away, supply disruptions remain. The global supply chain is still unstable and fragile. Not only do disruptions erupt here and there constantly, but global freight cargo has also increased in cost and remained high since the pandemic’s first phase.

► Finally, the Fed is now signaling that rate hikes of 50 basis points each – rather than 25 points each, as previously thought - are on the table. As American inf lation begins to look more and more stubborn, the likelihood of a heavy-handed response increases.