Turkish finance minister’s borrowing moves ‘risk accentuating recession’

Turkish finance minister’s borrowing moves ‘risk accentuating recession’
By Akin Nazli in Belgrade November 23, 2018

Turkish Finance Minister Berat Albayrak has caused consternation among opposition MPs and analysts after telling a budget committee in parliament on November 22 that he does not really need to borrow Turkish lira through the end of the year but that does not mean that he will not, news agencies reported on November 23.

“Big effort to get borrowing costs down. I guess question whether price been paid is a build-up in areas on government spending. That kind of just pushes the problems into credit space and accentuates the depth of the ongoing recession,” Timothy Ash of Bluebay Asset Management responded in a note to investors.

With question marks beginning to bother the Turkish lira (TRY) bulls who have perhaps too happily run in the slipstream of Albayrak since the beginning of September when he played a straight bat in London meetings with investors amid jitters over Turkey’s currency crisis, Turkish daily Sozcu reported that Albayrak’s pinkish comments on the economic outlook at the committee drew rebukes from opposition MPs.

“What you are saying is a far cry from the truth. If you also believe in what you are saying, then it means we are in deeper trouble. Some of your statements show that you are far from understanding how severe the [economic] situation is,” Durmus Yilmaz, a former central bank governor and current Iyi [Good] Party MP, told Albayrak, the son-in-law of Turkish President Recep Tayyip Erdogan who appointed him finance minister in July, the newspaper reported.

“I am sure you will sign the 20th standby agreement with the IMF following the [March local] elections,” Yilmaz reportedly also said to Albayrak, adding: “You are playing with fire by trying to lower interest rates via fiddling with the Treasury auctions. This method was tested in 1994, it ended up with a crisis. While attempts were made to lower interest rates by a few points, we experienced astronomical interest rates like 300 to 400 percent. Cancelling auctions and the emergence of interest rates at fairly low levels compared to market realities thanks to the public banks’ bids is extremely risky. Are you aware… you are tampering with the genes of the government domestic debt market. Do not do this.”

According to a presidential decree published in the Official Gazette on November 23, local governments’ debts will not be cut from their tax revenues across the first three months of 2019.

Turkey is to hold its local elections on March 31.

‘Ashamed of police enforcing price controls’
Yilmaz also told Albayrak he felt ashamed when he saw foreign TV commentators making fun of the Turkish police enforcing price controls at grocery stores, Sozcu also reported. The government is taking a hard line on any price rises officials determine are opportunist amid Turkey’s double-digit inflation, running at a 15-year high of around 25%, very slightly ahead of the central bank’s benchmark interest rate.

“The cancellation of the Treasury auctions is a significant factor in the latest fall in interest rates. However, without permanently lowering the government’s borrowing needs, an interest rate cut comes through this way will not be durable,” Selva Demiralp wrote on November 23 in her column for daily Milliyet.

Turkey is monitoring global best practices in the management of the Treasury and is planning “a very different auction methodology” in 2019, Albayrak also told lawmakers on the budget committee.

The Treasury does not have additional lira borrowing needs for December but that might change if it was decided that an adjustment would result in the better use of public resources, Albayrak said, adding: “I do not need it until the year-end but I may [turn out to] need it. If I find a decent opportunity I will surely utilise it to lower interest costs and more effectively use public resources.”

The government had increased the amount of special-purpose bonds that it can issue from 1% of expenditures to 3% as a preparation for difficult times such as the global financial crisis of 2008, Albayrak also informed MPs.

Change in pricing behaviour
Turkey has seen strong disinflation and a change in pricing behaviour since September, according to Albayrak.

The gross debt stock of Turkey's central government contracted by 3% m/m to stand at TRY 1.08tn in October, after contracting by 3% m/m in September, thanks to a sustained rally in the local currency, the Treasury said on November 20.

The Treasury accepted all bids, with a total worth of TRY3.24bn, at a domestic lease certificate auction held on November 20, the authority said in a statement. It previously said on November 19 that it planned to sell TRY2bn worth of paper.

The Treasury raised a total of TRY6.9bn from the domestic market in November.

According to the previously announced domestic borrowing strategy, the authority was planning to borrow a total of TRY22.4bn from the domestic market in November versus a debt redemption of TRY21.8bn.

“In December, domestic debt redemption is projected as TRY 2.8 billion, while domestic borrowing is projected as TRY 3.4 billion,” the Treasury said on October 31.

The Treasury is expected to announce its updated three-month domestic borrowing strategy on the last day of the month as usual on November 30.

“The sharp slowdown in Emerging Europe was driven largely by Turkey, where industrial production contracted in September,” Capital Economics said on November 22 in a research note, adding that the bounceback in Turkish PMI suggests that the contraction in industry there may have bottomed out.

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