Can Simsek deliver?
As I pen this note Mehmet Simsek’s appointment as the new boss of the economy wasn’t yet official. I don’t know if this happened or not but if it has happened surely Mr. Simsek could be a big help.
● Yes, but this help is conditional on the degree of freedom he would enjoy –and the duration of his freedom. Otherwise, Naci Agbal’s and Lutfi Elvan’s tenures had also helped normalize monetary matters but they didn’t last long.
● The exchange rate-protected TL deposits already pay up to 40% net interest and normal TL accounts also pay rates that are visibly higher than before. The policy rate doesn’t play a role there. So, interest rates could go up a bit more; they are heading north anyway.
● Obviously, this can be done without changing the 8.5% policy rate. However, this isn’t the end of the story. There is the problem of building credibility, accompanied with a drastic personnel change in key positions. There are also fiscal policy issues.
● The problem isn’t with TL. After all nobody will try to conquer inflation. Ahead of local elections that isn’t a realistic expectation. Printing money and retroactively compensating for some of the real earnings loss will be the main fiscal policy line.
● The FX front is different. Foreign trade deficit soars, which makes the CBRT reserves depend on swaps and other temporary arrangements. The traditional rediscount credits and the export channels aren’t that important today.
● The most likely outcome is a gradual depreciation. Nevertheless, even this requires some ammunition on the FX front. If you cut CBRT sales all of a sudden, the exchange rate could jump to unacceptable levels within days. “Overshooting” isn’t something we aren’t familiar with.
● Given the time frame, however, it is also likely that what is to be done will be done quickly. At least exporters will be happy, and hoarding inputs, piling up inventories type of hidden dollarization behaviour would be curtailed. There will be some visibility.
● But watch out! After that normalization period, just a few months before the elections, things might change again.