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US BANK EXPLAINED TURKEY’S CURRENCY CRISIS IN 14 QUESTIONS: WHAT IS THE DIFFERENCE, WHAT WILL HAPPEN NOW?
- One of the leading US banks, by forex and bitcoin a billionaire J.P.Morgan has published a striking report that addresses the recent currency crisis in Turkey in 14 questions and answers. The report listed the similarities and differences between the previous and current exchange rate rises, as well as a remarkable forecast of the Central Bank’s interest rate policy.
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THE SHARP DEPRECIATION RECORDED IN THE TURKISH LIRA RECENTLY CONTINUES TO BE ON THE WORLD AGENDA.
- One of the leading US banks is J.P.Morgan published a striking report comparing the recent rise in the dollar/TL with previous examples in 14 questions and answers.
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- The report also listed the similar and different sides of the last exchange rate attack compared to the previous ones.
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1- HOW BIG IS THE FINAL DEPRECIATION IN TL COMPARED TO PAST EXAMPLES?
- The recent depreciation in the TL is among the largest and sharpest in recent.
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- The dollar /TL rose by 47 percent compared to the level at the beginning of September. The exchange rate increase in November alone was about 25 percent, based on the 12.00 level at the time of writing this report. The wolf has been sighted over 13 times this week.
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- TL experienced the fastest depreciation in the past decade according to the number of days it started selling.
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- In April-August 2018, the rate of exchange rate increase was 64 percent, but when looking at the number of working days, it had spread over a longer period.
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- What is new about the recent depreciation is that the tolerance for the weakness of the TL has increased slightly. This, in turn, may be due to the fact that the vulnerabilities of external financing have been somewhat reduced. Nevertheless, the dollar / TL has reached a level that the Central Bank announced.
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- In contrast, the performance in bond interest rates, risk premium (CDS) and equities did not stand out compared to previous periods of exchange rate increase pressure.
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2- WHAT ARE CURRENT EXTERNAL VULNERABILITY INDICATORS COMPARED TO PREVIOUS PERIODS OF EXCHANGE RATE INCREASE?
- The current account deficit and the external debts of the private sector are at a lower level compared to previous periods. We think that this is the main distinguishing factor in the current situation, and the reasons for the weakness in the TL have changed. In addition, the reduction of financing concerns has also probably led to an increase in tolerance for exchange rate increases.
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- As of September, the ratio of the current account deficit to national income is at the level of 1.7 percent compared to the seasonally adjusted quarterly average. July 2020, the rate increase was 6.7 percent, and in April 2018, it was 5.1 percent.
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- Increasing price competitiveness and the rapid recovery in tourism, as well as the normalization of gold imports and the control of imports, stand out as the main positive factors.
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- On the other hand, although the current levels are not significantly higher, the signals of an increase in credit growth pose a risk to the current account deficit in the coming period. Low real interest rates can further increase credit growth.
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- The foreign exchange deficit of firms other than the financial sector decreased significantly from the level of $ 174.5 billion in December 2018 to $ 126.7 billion. During this period, foreign currency loans of companies decreased by $ 27 billion, while foreign currency deposits increased by $ 23 billion.
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3- WHAT TRIGGERED THE RECENT DEPRECIATION IN TL?
- Inflation. A distinctive feature of the current depreciation in the TL is the high level of inflation and inflation expectations. Core and headline inflation were 16.9 percent and 19.9 percent per annum, respectively, in October .
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- Real interest rates are at a markedly negative level as the Central Bank reduces its policy interest rate to 15 percent. Inflation expectations are also at the highest level compared to the beginning of the previous exchange rate increase period.
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- Too loose monetary policy at current levels of inflation and inflation expectations risks destabilizing the macro-economic environment. This is especially true during periods of frequently recurring exchange rate increases and high inflation.
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4- AT WHAT LEVEL SHOULD REAL INTEREST RATE BE FOR THE STABILITY OF THE EXCHANGE RATE?
- Looking at previous examples in Turkey, real interest rates had to rise to about 2.5 percent compared to core inflation in order for the TL to stabilize. Currently, this rate is -1.3 percent in Turkey, and if the policy rate remains constant, we expect real interest to decline to -3.4 percent in May 2022. When the headline is calculated according to inflation, lower figures are reached.
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- Compared to our inflation forecast, real interest is at -2.9 percent. This rate should rise to 3.2 percent.
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5- WHAT INTEREST RATES DOES THE MARKET PRICE IN MONETARY POLICY?
- In the swap market, a sudden and drastic U-turn in interest rate cuts is priced in.
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- A total of 491 basis points of interest rate increase is being priced in this market until March 2022, and 743 basis points of interest rate increase is being priced in by the end of next year. In this case, the policy interest rate will exceed 22 percent by the end of next year.
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6- HOW IS THE DOLLARIZATION COMPARED TO THE PREVIOUS EXAMPLES?
- In the current example, the pressure of deposit dollarization is limited. In many previous examples, the sale of foreign currency by domestic residents and companies had been a stabilizing force against exchange rate increases.
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- The limited dollarization pressure may also be one of the reasons why the authorities seem less concerned about the depreciation of the TL compared to their predecessors.
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- On the other hand, negative real interest rates probably increased the demand for dollars last week. Local demand for foreign currency has increased sharply over the past week.
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- When adjusted for the parity effect, local foreign exchange demand increased by $ 1.1 billion last week, the largest increase in the last 9 months.
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- The fact that TL deposit rates do not provide sufficient protection against inflation stands out as the main difficulty. This can lead locals to other assets to protect their savings.
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7- WHAT IS THE POSITION OF FOREIGN INVESTORS IN GOVERNMENT BONDS DENOMINATED IN TL?
- The foreign share in the TL-denominated bond market is at a record low level. As of October 2021, the foreign share in government bonds denominated in TL is only 3.8 percent. This figure had seen a peak in April 2013 at 26 percent.
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- In the recent depreciation in the TL, we do not think that foreigners are the main driving force. On the other hand, it is possible that foreigners will further reduce their positions.
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8- WHAT IS THE SHARE OF FOREIGNERS IN TURKEY’S FOREIGN CURRENCY BONDS
- Foreigners have been regularly reducing their positions in Turkey’s foreign currency bonds (eurobonds) since 2019.
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- The share of foreigners in the eurobond market, which was 63 percent in the middle of 2019, has declined to 48 percent in the current situation.
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9- WHAT ARE THE BANK BOND VALUATIONS COMPARED TO THE PREVIOUS EXAMPLES?
- Compared to previous examples, bank bonds in the current situation have not reacted much. We think this has something to do with the improvement in the gross foreign exchange reserves of the Central Bank and the fact that it seems ready to allow a correction in the TL.
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10- HOW CAN TURKISH BANKS’ FUNDING BE AFFECTED?
- In 2018, the external funding of banks was affected, which can be clearly observed in the repo market. But in subsequent periods of stress, this did not happen.
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- Similarly, the deposits of banks were more at risk in 2018, and the volume of physical currency in the hands of banks had increased sharply.
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- For banks to expose risk in their external debt cycles or deposits, there needs to be a shock like in 2018 or even more drastic. The current market stress is not at that level yet.
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11- HOW CAN THE CREDIT QUALITY OF BANKS IN TURKEY BE AFFECTED?
- We believe that the strong growth conditions in the past and the short-lived nature of past growth shocks have prompted banks to restructure/refinance problem loans and postpone appropriate accounting and provision allocation. This indicates that they may not be prudently allocating funds for high-risk loans. But we are not too worried about this situation.
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- Unless growth slows down markedly and remains low for a long time, unless there is a sudden stop in lending (which is not expected at the moment), banks may continue to postpone their problems.
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- As a result, we do not expect that there will be any high pressure on banks’ credit costs and capital ratios due to problematic loans in the short term.
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- Banks are profitable; under stable macro conditions, they can allocate provisions for high-risk loans over time.
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12- WHAT CAN HAPPEN IN THE TURKEY STOCK MARKET WITH THE RECOVERY?
- Investors are used to periods of financial market weakness in Turkey, such as now. But investors should also remember that the recovery is also strong.
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- The previous four examples showed short-term sharp rises exceeding 50 percent on average. Each of these upturns began at the moments when real interest rates began to rise and investor perception of monetary policy changed.
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- The allure of a 50 percent rally in a liquid stock market offers short-term investors a good reason to pay attention.
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13- ARE STOCK IN TURKEY VALUATIONS ATTRACTIVE?
- In Turkey, valuations are among the lowest in the Central and Central Europe, Middle East and Africa (CEEMEA) region when viewed in terms of price ratios and dividend yields. Especially high dividend rates attract attention.
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- We expect that outflows from global emerging market funds, including Turkey, will continue. Turkey’s share in the fund of all developing countries has decreased to 0.25 percent.
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14- HOW IS THE SECTOR COMPOSITION OF THE STOCK EXCHANGE?
- The Turkish banking sector, which had a share of more than 50 percent in the past, declined to 26 percent. Energy and materials are on the rise with exporting sectors such as automotive and white goods.
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President of Organ Transplant Center at MedicalPark Hospital Antalya
Turkey's world-renowned organ transplant specialist. Dr. Demirbaş has 104 international publications and 102 national publications.
Physician's Resume:
Born on August 7, 1963 in Çorum, Prof. Dr. Alper Demirbaş has been continuing his work as the President of MedicalPark Antalya Hospital Organ Transplantation Center since 2008.
Prof. who performed the first tissue incompatible kidney transplant in Turkey, the first blood type incompatible kidney transplant, the first kidney-pancreas transplant program and the first cadaveric donor and live donor liver transplant in Antalya. Dr. As of August 2016, Alper Demirbaş has performed 4900 kidney transplants, 500 liver transplants and 95 pancreas transplants.
In addition to being the chairman of 6 national congresses, he has also been an invited speaker at 12 international and 65 national scientific congresses. Dr. Alper Demirbaş was married and the father of 1 girl and 1 boy.
Awards:
Eczacibasi Medical Award of 2002, Akdeniz University Service Award of 2005, Izder Medical Man of the Year Award of 2006, BÖHAK Medical Man of the Year Award of 2007, Sabah Mediterranean Newspaper Scientist of the Year Award of 2007, ANTIKAD Scientist of the Year Award of 2009, Social Ethics Association Award of 2010, Işık University Medical Man of the Year Award of 2015, VTV Antalya's Brand Value Award of 2015.
Certificates:
Doctor of Medicine Degree Hacettepe University Faculty of Medicine Ankara, General Surgeon Ministry of Health Turkey EKFMG (0-477-343-8), University of Miami School of Medicine Member of Multiple Organ Transplant, ASTS Multiorgan Transplant Scholarship. Lecturer at Kyoto University. Lecturer at University of Essen, Research assistant at the University of Cambridge .
Professional Members:
American Society of Transplant Surgeons, American Transplantation Society Nominated, Middle East and Southern Africa Council Transplantation Society 2007, International Liver Transplantation Association, Turkish Transplantation Association, Turkish Society of Surgery, Turkish Hepatobiliary Surgery Association.
Disclaimer:
Our website contents consist of articles approved by our Web and Medical Editorial Board with the contributions of our physicians. Our contents are prepared only for informational purposes for public benefit. Be sure to consult your doctor for diagnosis and treatment.
Turkey's world-renowned organ transplant specialist. Dr. Demirbaş has 104 international publications and 102 national publications.
Physician's Resume:
Born on August 7, 1963 in Çorum, Prof. Dr. Alper Demirbaş has been continuing his work as the President of MedicalPark Antalya Hospital Organ Transplantation Center since 2008.
Prof. who performed the first tissue incompatible kidney transplant in Turkey, the first blood type incompatible kidney transplant, the first kidney-pancreas transplant program and the first cadaveric donor and live donor liver transplant in Antalya. Dr. As of August 2016, Alper Demirbaş has performed 4900 kidney transplants, 500 liver transplants and 95 pancreas transplants.
In addition to being the chairman of 6 national congresses, he has also been an invited speaker at 12 international and 65 national scientific congresses. Dr. Alper Demirbaş was married and the father of 1 girl and 1 boy.
Awards:
Eczacibasi Medical Award of 2002, Akdeniz University Service Award of 2005, Izder Medical Man of the Year Award of 2006, BÖHAK Medical Man of the Year Award of 2007, Sabah Mediterranean Newspaper Scientist of the Year Award of 2007, ANTIKAD Scientist of the Year Award of 2009, Social Ethics Association Award of 2010, Işık University Medical Man of the Year Award of 2015, VTV Antalya's Brand Value Award of 2015.
Certificates:
Doctor of Medicine Degree Hacettepe University Faculty of Medicine Ankara, General Surgeon Ministry of Health Turkey EKFMG (0-477-343-8), University of Miami School of Medicine Member of Multiple Organ Transplant, ASTS Multiorgan Transplant Scholarship. Lecturer at Kyoto University. Lecturer at University of Essen, Research assistant at the University of Cambridge .
Professional Members:
American Society of Transplant Surgeons, American Transplantation Society Nominated, Middle East and Southern Africa Council Transplantation Society 2007, International Liver Transplantation Association, Turkish Transplantation Association, Turkish Society of Surgery, Turkish Hepatobiliary Surgery Association.
Disclaimer:
Our website contents consist of articles approved by our Web and Medical Editorial Board with the contributions of our physicians. Our contents are prepared only for informational purposes for public benefit. Be sure to consult your doctor for diagnosis and treatment.
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