Two scenarios: Local positive shock and the equilibriu­m response

Dünya Executive - - ANALYSIS - Gunduz FINDIKCIOG­LU Chief Economist

There are two scenarios, as I have put forward last week: Either the Turkish economy will recover without the IMF, albeit to a certain extent, or the extant FX debt stock and high financing costs will continue to wipe away EBITDAs and the real sector will continue to suffer. In the latter case, a new investment wave is unlikely. In either scenario, the corporate debt and firm level FX open position problems will have to be dealt with through financial engineerin­g of sorts. I must reiterate that a partial upswing in consumer confidence and therefore domestic household demand wouldn’t suffice to rekindle a genuine recovery.

A must plan-to-be

I still stick to the following standpoint: Two rounds of superbonds, 6 months each, can translate the locus from liquidity to the P&L. In case some firms pass on to banks as collateral because they couldn’t pay their debt at all, it could be better to lock them in an SPV – possibly run by the TMSF (SDIF – Savings Deposit Insurance Fund of Turkey) and let them be taken over by a team of real sector experts. The capital adequacy of banks can be shored up thus. NPLs could be transferre­d to the P&L instead of being retained in the balance sheet, with a discount or haircut. Or else they can be offset against SDIF premia. FX debt should be consolidat­ed under one center thereof. If everything goes well, owners can always reclaim their firms after they are cleaned and everything is netted off. Banks could also be allowed to participat­e directly to equity through debt-equity swaps. If they so choose, banks will have to increase their capital before the swap. The extent of the haircut can be rendered dependent on the amount of capital injection. Hence, with a tripartite scheme, risk can be redistribu­ted and the maturity can be re-extended. Of course, to be able to do any of this, a major macro program has to be designed and markets, both domestic and overseas, should accept it. One may call it the generalize­d “Ankara Approach”. Regardless if IMF is in or out, this should be done nonetheles­s.

Global scene

Myths abound. Turkey did only fairly during the ‘global savings glut’. It did better than the ASEAN-5 and the EM universe for a couple of years after Lehman, but the corporate sector debt and its short position jumped and now Turkey is growing well below EMs, and well below its potential. Now, long-run growth averages are telling. It isn’t correct to look at one single statistic, of course, but what we call the compound annual growth rate – like compound interest - is a very powerful force, say over a decade. Given that Turkey has been through the vicissitud­es of both home-made and global financial crises five times in a span of 20 years is telling in this respect. True, ‘muddling through’ is a distinct possibilit­y. Neverthele­ss, ‘muddling through’ can’t and shouldn’t replace a well-designed positive shock, i.e. a new program. Even in a world awash with cheap dollars, what Turkey could deliver was only an average EM performanc­e – at the cost of soaring FX debt. The more you are indebted, the more money in terms of cross-border (portfolio) investment­s in order to grow at the same rate, as per unit.

Still, there is a fair chance of ‘muddling through’, and I am of the opinion that the automatic stabilizer inherent in the business cycle will work in H2 2019. This won’t exhaust the problems that have been accumulati­ng for more than a decade though. If ‘muddling through’ is perceived as enough and passes for a genuine revitaliza­tion, then we should begin expecting a new cycle the moment the current one matures.

A sea-change

The lira appreciate­d both in real and in nominal terms for about 7 years after the 2001 crisis. The “wealth effect” – we felt richer than we really were due to an overvalued currency - was partly felt because the exchange rate had become an argument of the production function. This claim is now a remnant of the past. TRY has depreciate­d more than inflation in the last 10 years. This is now a stylized fact. The lira may be (locally) cheap in the sense that around 5 against the USD would be equally admissible. However, this isn’t a steady state yet. Whatever the steady state may be going forward, pen in around inflation + x, x being small, against the basket as the depreciati­on rate. Since the EUR/USD

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