Fund managers are still waiting for changes Turkey has long promised
Discussion of structural reform is regularly mooted in Turkey, whether it is motivated by an International Monetary Fund stand-by programme or advice from the World Bank or Turkish conglomerates and small and medium-sized companies, which make up more than 70 percent of gross domestic product.
The discussion is in full swing again, and its tone is about facilitating economic growth. Reforms in industry, new incentives for corporations involved in e-business, reform of payrolls – the list of areas for improvement goes on.
Turkey needs these reforms if it is to create new jobs for about a million young adults each year, the most dynamic segment of the working population. The government’s answer is simple: expanding the construction and services sectors. However, the current environment needs much more complex solutions. Otherwise, fears are of another crash, like those seen in 1994 and 2001, which resulted in mass job losses, high inflation and more.
Last week, I met a high-ranking executive from a technical due-diligence company servicing the construction sector in Western Europe. He said that the company recently closed its office in Istanbul due to project cancellations before the April 16 constitutional referendum and ongoing delays, which may continue for the rest of this year. The company relocated its office in Frankfurt.
Another Britain-based architecture firm, Aukett Swanke, re- ported that its financial results would be lower after project cancellations in Istanbul. These examples from the construction sector, which amounted to 30 percent of Turkish GDP, are worrying.
This month, Turkish Prime Minister Binali Yildirim and former Greek Finance Minister Yannis Varoufakis gave some free advice to British Prime Minister Theresa May about the Brexit negotiations with the European Union.
“People have become exhausted. The main problem with the EU is it has become a very bureaucratic state, instead of a political state,” Yildirim said in an interview with the London Evening Standard on May 15. He also recommended a customs union agreement between Britain and the EU and stated that it would be much easier than the alternative.
Meanwhile, Varoufakis wrote an open letter to May saying that a careful strategy is needed for Brexit. “The political utility to the Brussels establishment of leading the UK-EU negotiations to impasse is greater than any disutility they might experience from watching European people and businesses lose out,” he wrote in the same paper on May 10.
It is fine for Yildirim and Varoufakis to dole out advice to others. But both politicians would do well to heed their own words back home. The Turkish economy needs reforms immediately. Every politician gives advice on delicate matters such as negotiations, structural reforms and geopolitics. We do not need someone to talk about the necessity of structural reforms; the Turkish economy needs reforms without wasting any more time.
Forex volatility expected later this year
For a detailed outlook about the foreign-exchange movements in the months to come, here is an extract from a note written by Athanasios Vamvakidis and David Hauner, strategists at Bank of America Merill Lynch.
“Foreign-exchange volatility has collapsed to the lowest level since end-2014 for a number of reasons. Global data has been strong, as outlined already. Company earnings are at multi-year highs, both in the United States and the euro zone. Despite high uncertainty about U.S. President Donald Trump’s policies early in the year, there have been no surprises for markets – positive or negative – so far. The risk of the French election is behind us. The U.S. Federal Reserve has managed to increase rates without changing the market’s risk appetite.”
Hopefully, these will not be famous last words. Market volatility could remain low and risk assets supported in the coming months. With the exception of the situation in North Korea, which is unpredictable, there are no major risks in the short term, though there are always only potential blind spots.
However, several important factors could trigger more market volatility in the autumn. Among the key issues is whether the Fed raises interest rates again in September and December or starts unwinding its balance sheet by the end of the year. Speculation persists that Trump could replace its chairwoman, Janet Yellen. If so, by whom? Trump and the Republican-led Congress may struggle to pass substantial tax reforms, due to the immense political and legal pressure he now faces due to allegations his campaign was in contact with Russian officials during his bid for the presidency last year.
The timing and pace of the European Central Bank’s quantitative easing tapering and the sequence with deposit rates is another key matter. A German election raises questions about whether the next chancellor will be able to work with President Emmanuel Macron on euro zone reforms. Assuming real negotiations on Brexit will start after the German elections, how fast will talks move? Will the EU and Britain waste time negotiating about the negotiations and then about British budget contributions and EU citizens residing in the Britain? No one knows when there will be clarity about a transition period and the form of the final trade agreement.
All of these developments could impact benchmark currencies and change calculations for Turkey too. At least in Turkey, we’re accustomed to a bit of volatility.