Hard times, hard choices

clear that a V-shaped IT HAS BECOME recovery or even any recovery is unlikely in the short span. IMF managing director, Kristalina Georgieva, has already suggested that the new IMF Outlook will be gloomier. Globally, 2020 and even 2021 are in jeopardy. In fact, 2020 is already lost. After all, Jerome Powell mentioned the possibility that the result could be “an extended period of low productivity growth and stagnant incomes”. Further to that, he conceded that “the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems. Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This trade-off is one for our elected representatives, who wield powers of taxation and spending.” We understand that there is a trade-off but no matter, the cost will be later, spending and monetization are the order of the day. This applies to Turkey also, but there is also an exchange rate problem here. Yet it doesn’t follow that a traditional balance of payments crisis is currently in the cards. We shall see clearly after a couple of months of ‘normalization’, so to speak, and the outcome of the tourism season. I repeat: TRY creation and the unavoidably large budget deficits aren’t the main problem. Inflationary and other consequences of such moves will differ as the speed and magnitude of a demand kick-up unfolds. The burning and short-term issue is inadequate FX reserves.

FX AND SWAP OUTLOOK

It looks like net reserves are negative if we exclude swaps. In fact, the swap book can never be included in reserves, for swaps are off-balance sheet, but let’s leave that for now. Even if net reserves aren’t negative, they were clearly falling, yet another $2 billion eroding in the first week of May. Many years ago, some quarters argued that gross reserves would do the trick as well, as long as the maturity structure allowed it. For this to happen, two things need to be in order: the FX shortage ought to be short-lived and some extra funds should be on call. Swaps can be such a device; even the Fed opened up swap lines to some countries in order not to let USD liquidity dry elsewhere when in the U.S. dollars and deficits abound. For the time being there is the Qatar swap line, which has been extended to $15 billion. However, this doesn’t mean anything because the swap is with the Qatari Riyal, not with the dollar. Is it possible to trade Qatari Riyal that amounts to $15 billion in London? Yet we continue in the same vein, a policy trail that was rendered visible on May7. Why is that so? It looks like the government believes in the imminence of a return to some kind of normalcy. Shops will re-open, hotels will work, and at some point retail will rekindle itself as if nothing has happened. If this is so, the fragile mix of low TRY rates-cum-low FX revenues might continue to hang in the balance. But is this a realistic expectation? Well, it depends. It all depends on who you are and what you have to build ‘what you