I woke up to news of Ismael Haniyeh’s assassination presumably by Israeli forces; and finishing my day pondering the implications of Fed rate cuts for Turkish economy, which most experts believe is to be the case after Powell’s post-FOMC press conference. Fed is expected to trim rates twice this year, and four times the next, according to pricing in futures markets.
Traditionally, lower fed funds rates are accompanied by a softer USD, both of which help drive financial capital into Emerging Markets (EM), where currently Turkey stands out (along with India) with the narrative of an economic stabilization program to achieve low inflation and sustainable current account deficits.
Yet, Fed monetary policy is not the only exogenous variable bearing on Mehmet Simsek-orchestrated austerity drive (which I shall call “the Economic Stabilization Program” for the rest of this article). An all-out war in the Middle East and the American presidential race, too, will matter to the Turkish economy. At the end, considering all these exogenous factors in juxtaposition, I speculate odds of Simsek getting an assist from external events is the likelier scenario.
Turley needs a softer dollar and lower American interest rates to roll-over her foreign debt maturing in a year estimated at ca $200 bn plus a current account deficit which will have fallen to $25 bn by year-end, ceteris paribus. Turkish banks and non-financials will borrow more and pay lower interest rates in a setting of Fed monetary loosening. Mehmet Simsek’s Economic Stabilization Program (ESP) has already attracted substantial sums of foreign financial investment, estimated anywhere between $20-40 bn since it started in June 2023. Yet, judging by the recent history, this is peanuts.
When Erdogan’s son-in-law Berat Albayrak took over the post of economic czar from Mehmet Simsek in 2018 to destroy any vestiges of rational economic policy, the stock of global financial investment in the country was estimated at $150 bn, including interest rate and currency swaps, for which data is hard to find and sometimes to interpret. While Turkey’s ESP story is not the most attractive among EMs, a vast majority of global fund managers are underinvested. It is not unreasonable to predict that new foreign investments driving the total stock to Albayrak era peaks in a couple of years.
Such strong inflows of hard currency will help Central Bank (CBRT) extend the duration of its current strong TL policy, drive bond yields lower and make bank credit more ample and cheaper.
To be brutally honest, my humble read of economic conditions in the USA is vastly different from those of a majority of experts. Economic growth, employment and consumer demand seem to be ticking along very well, which is good for the soft landing scenario, but in the past such conditions have also been associated with rising inflation. I put an asterix next to my views and simply assume Fed will behave as the majority of the pundit community believes.
Yet lower fed funds rates are not the only exogenous variable affecting ESP. A major boost to Turkish economy will come from cheaper Brent oil and natural gas prices, which seemed underway until Haniyeh was killed. Now, there is wide-spread and justified fears of an all-out war in the Middle East, drawing in Hezbollah, Iran and global actors like US. Such episodes will undoubtedly witness stricter scrutiny of Iran’s oil exports, and sabotages on energy production facilities and of supply routes. Turkey can probably live with Brent at $80-100 barrel for six months without the ESP suffering lethal damage.
But, “higher for longer” Brent prices will severely test the ability of Mehmet Simsek and CBRT governor Fatih Karakan’s to tame inflation. Additionally, Turkish financial assets are essentially a call option on cheaper energy prices, meaning the counterfactual could cause exits by global investors, reducing CBRT’s FX reserves. Do I believe in an all-out war scenario? Preoccupied with the consequences of a potential Trump presidency and the Forever War in Ukraine, all power players will exert pressure on Iran and Netanyahu not to take matters furthers. But in a game where both actors aim at prolonging the war without escalating it, accidents can happen, triggering non-linear and very negative outcomes.
I’m not going to make a prediction about American presidential elections. Kamala is “dope” and Vance a time bomb, but no matter how I cut and slice poll data I see a very close race, with the outcome coming down to a couple of thousand votes in a couple of battleground states. But, the choice is clear for Erdogan. While Kamala Harris will not necessarily mean new tensions in the troubled Turko-American relationship, Trump had enjoyed a solid working relationship with Erdogan, except in one case. When Erdogan refused to arrange the release of American Pastor Andrew Brunson, Trump sent a “I will destroy your economy” tweet, which sent Brunson packing—home.
If Trump is re-elected, he can soothe the tensions arising from Turkey and Pentagon taking opposing sides vis-a-vis Syrian Kurds, persuade Erdogan to ditch Russian made S-400 missiles to be re-invited to the F-35 jetfighter program, and, and, most importantly ease the consequences of a potential guilty verdict for state lender Halkbank in the ongoing NY federal court trial on charges of helping Iran violate sanctions and money laundering.
Let’s say the odds of a second Trump presidency is 50%. This still leaves Simsek with Fed rate cuts, and stable oil prices in the middle East, the value of which will become very noticeable this winter after huge hikes to pump prices, natural gas and electricity as a result of the twice-annual adjustments to state-controlled prices and VAT taxes.
Atilla Yesilada, Global Source Partners Turkey advisor and CEO of Yesilada Consulting.
Yesilada is also the co-owner of PATurkey website.
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