Where the hell is going Turkish Lira and what is my best case?
Turkey 5Y CDS is 20% over its peak in 2018 crisis now — so they are the exchange rates
Most worrying (horrifying) indicator of today’s economy of Turkey: CDS is 20% over its peak in 2018 crisis by 652 as of 07.04. Which had been down to 238 two months ago.
Consequently, exchange rates have started to climb again as a second wave after 2018, and we’ve almost used every single weapon to suppress it. Now it will be more difficult to have it under control with lower interest rates under this circumstances of pandemic.
Well, I’m not an economist but what my quite ordinary knowledge about the economy tells me is enough to worry about it.
I don’t know how we can survive with it. The glimpse of hope is an early down-trend in Covid-19 cases & deaths, where Turkey is positively somewhere in between China and West-Europe path. So next 2 weeks are crucial for many aspects of the future.
Pandemic is certainly one of the biggest factors of this hike not only for Turkey but also for other Emerging Markets, however it is not alone in our case.
CBRT reserves doesn’t look promising, if not, the perception since 2018 is negative. So resilience is essential. I’m not a fan of those IMF days but utilizing the package, which will probably be released by IMF for combatting post-Covid-19 period makes sense according to me. The Managing Director of IMF tells clearly:
“The IMF has a $1 trillion war chest and we are determined to use as much as necessary to help protect our member countries and the global economy from the scarring of this crisis."
Considering the social and psychological impacts of the pandemic with its prospective disruption in the economy and combining this effect with the outlook of the CBRT reserves and current external debt, where we need the money the most, naturally increases the risk premium.
As a result: How I see it in general?
Major risks ahead of the economy
- Uptrend in Covid-19 cases & death toll and tougher restrictions e.g. Complete lockdown
- Decline in demand over 50%
- Strong increase in unemployment rates
- Increasing budget deficit
- High external debt of private sector
- Lack of liquidity despite global rate cuts
- CBRT reserves at most sensitive levels
- Vulnerable and volatile exchange rates
- Never ending Syria conflict, Idlib is still complicated
- And finally back to high inflation spiral after second wave of exchange rate rise and all those above mentioned developments.
Opportunities
- Early downtrend in Covid-19 cases and death toll
- Low Brent oil price level is positive for inflation and current account balance
- Low (almost zero) interest rates across world, though it seems that we can’t utilize it as it should be
- Promising export potential after containing the virus, although in short term the demand in Europe is expected to be halved
- IMF option with low interest rate and open invitation to combat the crisis
- Back to IMF: The Government has many times denied to apply IMF for any kind of loan but this time it is different and everyone in the country would probably understand its necessity and that might convince the GOV to pursue this way. It is a fact and happening: Turning the edge under this Reserve / Debt / Income (declining Export and Tourism income) triangle will be quite a miracle.
- More or less all these opportunities might decrease the CDS and risk premium which will ease the stress on Turkish Lira.
In (my) best case;
- Utilizing the package of IMF for only short-term debt and needs to strengthen reserves and obtaining liquidity to markets: Turning the edge
- A downtrend within May in Covid-19 cases and death toll, earlier than many countries based on our advantages
- Easing restrictions and recovering markets
- Increasing penetration and turnover of export within June
- Starting to stabilize beginning with small businesses during Q3
- Having a similar Q4 in 2020 like 2019, meaning continuing where we have left the recovery uptrend after 2018 crisis.
- Meaning: with 12 months of loss, we might be at the same point but stronger!
I consider myself as realistically conservative in this crisis but definitely not a pessimist. Unfortunately only a small part of the developments are under our control but on the other hand, all those past crises have improved our strength, resilience and especially endurance, which I see a huge advantage of us in such circumstances ahead.
So I won’t share a worst-case, which is on live coverage on TVs and Social Media every day.
Motto is clear: Take care yourself and your beloved ones. Stay healthy and look ahead the sunny horizon.
We’ll come over this virus eventually!
