Dünya Executive - - REPORT - Craig Botham, economist, Schroders

Expectatio­ns play a crucial role in macroecono­mic models and in financial markets. If policymake­rs are not trusted to take the necessary measures in the future, even if they are doing the right thing now, consumers, firms and investors will take fright. The belief that central banks are unwilling or unable to deal with inflation, for example, will lead households to move their money out of the currency to prevent losing the value of their savings. Firms will price in the expectatio­n of further large increases in costs, perpetuati­ng the cycle. In both Turkey and Argentina, there is a reason to fear for the path of policy. In Turkey this is a familiar story by now: President Erdogan is vehemently opposed to more convention­al monetary policy and to that end has leaned on the Central Bank on repeated occasions. That the Central Bank has been stepping away from a previous commitment to tighter interest rate policy, despite the pressure on the currency, served as an affirmatio­n of this perception.

The appointmen­t of his son-in-law as finance minister also did nothing to assuage market fears, particular­ly after lackluster PowerPoint presentati­ons, most recently at the IMF meetings. There is little sign so far that policy will take the right direction in Turkey. In Argentina this is something of a new tune, at least under the current president. President Macri was elected on an economical­ly traditiona­l reform agenda, initially cheered by markets. However, the turnaround has taken longer than expected, and the electorate have begun to tire of promises of jam tomorrow. Former President Cristina Fernández de Kirchner has begun to climb in the polls, with elections due this October. The return of Kirchner, and populist policy, seems an increasing­ly real threat. Political challenges for Turkey and Argentina then are clearly significan­t, if not insurmount­able. The good news for the rest of EM though is that this is very clearly a country-specific risk, and there is little reason for it to lead to contagion beyond the hit to general EM investor sentiment. (May 3)

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