Post-Election Turkey On The Road To Economic Perdition

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Includes: TUR
by: Albert Goldson

Summary

Erdogan’s post-election economic policies to “stay the course”, with aggressive spending and low interest rates exacerbating a weakening Turkish economy.

Turkey’s economic dilemma is like an $880 billion economic Titanic on the Bosporus badly listing at the cusp of slipping under the red waves of crushing debt.

Erdogan’s newly proposed 100-day economic action plan is to issue renminbi bonds and borrow from China probably to avoid an IMF bailout request.

For these reasons, investors should liquidate any and all Turkish-specific assets and/or short-sell.

President Erdogan’s post-election appointments of sycophants to key governmental positions, while maintaining an aggressive economic growth policy of spending and low interest rates, are damaging the Turkish economy. It’s a preventable morass that is attributable to an epic level of incompetence that will inevitably end in total disaster.

Erdogan’s aggressive economic policies since the July 2016 coup through late 2017/early 2018 to stimulate the economy can be politically justified to restore investor confidence and which resulted in an impressive 7.4% growth rate in 2017. However, such policies are merely a short-term panacea. A more conservative economic policy must be applied to protect the economy medium and long-term against worldwide trends such as a higher US dollar, interest rates, and energy prices.

My SA article 20 June 2018 entitled Erdogan Holds Cure for Turkey’s Economic High Fever outlined the economic reforms Erdogan must take to mitigate the growing risks. Unfortunately, according to his post-election decisions, he has listened neither to me nor well-respected economic experts.

President Erdogan now has an unprecedented level of authority. To give you an idea of the depth and breadth of his authority, with respect to budgetary matters, as reported by the 13 July 2018 Al Monitor article Turks Enter Uncharted Waters as Erdogan Forges Ahead with New Powers, Erdogan’s budgetary authority (which was transferred from parliament to the president) allows him to spend up to 25% of the national income as he likes. Because the entire state administration is under Erdogan’s control, he has eliminated checks and balances, which bodes badly for any investor.

The 3 August 2018 Wall Street Journal article entitled Turkey Needs Foreign Funds as Short-Term Debt Looms, as well as other official economic sources, provided an updated list of the deteriorating economic indicators:

  • Turkish lira (TL) has lost over 25% of its value to the US dollar this year and broke the 5 TL psychological barrier for the first time on 1 August.
  • The 10-year government bond yield has increased dramatically to 17.87% as of the end of July 2018.
  • Turkey’s debt owed in other currencies, according to the IMF, is 53% of its GDP at the end of 2017. According to the IMF, Turkey has the largest external debt-to-GDP amount among EM countries with South Africa second at 50%, Mexico at 38%, and Argentina at 37%.
  • Turkey’s 6 largest banks have had a considerable rise in non-performing loans in 1Q2018. Because they are highly reliant on foreign debt, if they are unable to roll them over, the central bank reserves aren’t big enough to cover the shortfall.
  • Consumer prices jumped 15.85% in July, the highest in 15 years.
  • Producer prices have increased 24%.
  • Turkey needs $200 billion in foreign financing mostly short-term to fund the current account deficit and maturing debt.

Exacerbating this increasing debt is the ongoing expenditures for several mega-infrastructure projects of which the most high-profile include:

  1. Airport: Estimated cost of $12 billion featuring 6 runways on a land mass as big as Manhattan (13 x 2 miles) whose partial opening is scheduled this fall.
  2. Canal: Estimated cost of $13 billion, 28-mile long canal linking the Black Sea to the Sea of Marmara.

Additionally, there’s the impact of potential widening US sanctions in addition to specifically targeted high-level Turkish governmental officials. The sanctions have already eroded investor confidence even amongst the most bullish.

Finally, I had the opportunity to inquire personally to how some western investment firms are looking at Turkey. On 11 July 2018, I attended the FX Week USA Conference featuring numerous panel discussions. One particular panel discussion entitled FX Investment & Strategy Risks & Opportunities Outlook in EM Currencies featured five highly-ranked corporate officers. Each panelist reiterated current well-known economic challenges among emerging market (EM) with respect to rising interest rates, strong US dollar, and increasing debt in foreign currencies.

During the Q&A session, I specifically asked about how their respective firms are factoring in the rising and projected sustained energy prices in their buy/sell analysis particularly since most EM countries are net energy importers. Shockingly, each and every panelist merely reiterated the problem without providing how their firms are factoring in this component, its level of risk in their forecast, and how they are repositioning their investment allocations or revised investment risk assessment to their clients. Their disturbingly evasive replies are a bright red flag that I interpreted as a confirmation that investors should rapidly sell off anything Turkey-specific and possibly many EM positions, while simultaneously consider short-sell opportunities.

According to the Financial Times article 4 August 2018 entitled Turkish Lira Hits New Low as Erdogan Chases High Growth, Erdogan announced an economic action plan for the next 100 days that includes issuing renminbi bonds and borrowing from China, yet maintains his aggressive spending plans and low interest rates.

In my opinion, the China option is a stop-gap. Should the China deal fall through or fall short of needed funding, one of his few remaining options would be to request an IMF bailout, one which Erdogan wants to avoid at all costs as articulated in the Al Monitor article 2 August 2018 IMF Option Looms Larger for Turkey Amid Row With US.

But there’s no guarantee that the IMF will loan them what they need, given the strong global anti-Erdogan sentiment as demonstrated by the paucity of high-level Middle East officials at his presidential swearing in ceremony that included only the Qatari emir and the absence of high-level Western European leaders.

Recommendation

Post-election, Erdogan has failed to capture the narrow window of opportunity to change economic policy to one that, although painful, would eventually put Turkey in a less vulnerable position.

Although markets would have reacted negatively to these worrying economic figures, Turkey is aggressively launching itself into the economic abyss. Additionally, there’s not much upside on the bullish global economy soon to run on fumes for any successful turnaround.

For the aforementioned reasons, I recommend an immediate and aggressive sell-off of Turkish-specific investments or short-selling Turkish-specific and related EM investments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.