Turkey’s Erdogan administration statisticians on the morning of February 3 announced that the country’s consumer price index (CPI) inflation officially reached 49% in January, the highest level recorded since the 53% posted in April 2002. As if that was not shocking enough, ENAG—an inflation research group led by Istanbul academics that is proving a thorn in the side of officials with its alternative inflation calculations—was soon on the scene asserting that inflation had actually climbed to 115% y/y.
Surveys have shown that Turks have little faith in the official inflation data, thus ENAG’s interventions don’t go unnoticed at the Turkish Statistical Institute (TUIK, or TurkStat), which is attempting to have the research group shut down with a court action that alleges ENAG is tarring TUIK’s reputation. Last month, the two organisations were also at odds when, on January 3, end-2021 inflation was released at 36% y/y by TUIK but calculated at 83% y/y by ENAG.
The January figure means that Turkey’s official inflation rate now sits 35pp above the central bank’s policy rate of 14%. The rate determined by ENAG is an astonishing 101pp above the benchmark.
Currently, the market and the central bank see official CPI inflation peaking at around 55% y/y in May (their forecast reckons without the Turkish lira crashing again, but that’s a ‘big if’).
As per usual, the TUIK updated its consumer price basket in the first month of the year. There’s little need to discuss it here. The data makes no sense.
ENAG, notably, said on January 4 that it would be calculating January inflation based on TUIK’s new basket.
President Recep Tayyip Erdogan, meanwhile, has committed to sticking with his unconventional monetary policy that in the last few months of 2021 brought 500bp of rate cuts despite rampant inflation. The lira promptly collapsed. No surprise there. Turkey’s monetary policy is cuckoo. Monetary policy efficiency is in deep minus. There are not too many foreign investors left in lira. And the policy rate no longer has any clear impact on domestic interest rates.
Since December 20, monetary conditions in Turkey have in fact tightened even though the policy rate has been kept on hold. From the second half of January, the Erdogan regime again started utilising the public banks to ease monetary conditions.
The announcements on lira interventions from the central bank are irregular and confused, but it’s clear the administration is still burning through the reserves.
The decreed seizure of 25% of export revenues supports the usable reserves while FX shortages work as another tightening cycle.
With crises everywhere you look, Turkey is a fiasco. Industrial production is the latest sector to fall into disarray, with officials wiping out much of the output of companies in industrial zones during late January by heavily restricting electricity use, claiming a lack of natural gas flowing from Iran meant not enough power could be produced. Intermediary goods importers are also weeping as they attempt to negotiate the lira carnage.
Despite the ‘switching off’ of industrial production, saving on energy bills, the trade deficit came in at a record high of $10.4bn in January.
On February 7, the central bank is to release the FX transaction figures for January.
The FX coming from the FX-guaranteed lira deposit scheme, announced by Erdogan in late December, is only seen on paper. It shifts the banks’ FX at the central bank from swap and required reserve accounts to the central bank’s own account. This supports the net reserves, but it makes no sense when it comes to the gross reserves or fresh FX inflows.
On February 2, Turkey’s finance minister Nurettin Nebati told Nikkei that a total of TRY272bn of deposits (around 5% of the overall TRY 5 trillion of deposits in the Turkish banking system) had been converted to date under the FX-guaranteed scheme, while TRY113bn ($8bn) has come from FX-linked deposits.
In calculating the dollarisation of bank deposits in Turkey, deposits under the FX-guaranteed scheme are added to the FX-linked deposits. FX-linked deposits are seen as FX on bank balance sheets while deposits under the FX-guaranteed scheme are seen as lira deposits. The only difference is that the central bank and the Treasury carry the FX risk attributed to the deposits under the scheme rather than banks.
(Take a moment. When reading through the Turkish finance minister’s statements ask yourself how much of an idea he really has about economics or politics. Looking at the shambles that is Turkey’s economy, ask what contribution he is making to regime policy. Could even Erdogan, subjected to forensic questioning, explain what economic policy he is following? Erdogan’s officials state things to the camera that bear little relation to reality. Well, the country’s prized finance minister has told Nikkei that he will be in London on February 7. In the past, trips to the British capital by Erdogan and some of his ministers have left London press interviewers stunned and perplexed.)
There are also rumours about “unidentified” inflows into Turkey.
The central bank’s net FX position (net reserves minus the Treasury’s FX account at the central bank), by @e507. Money coming from exporters and shifting via the new deposit scheme is supporting the net FX position. However, there is still some leakage. It is thought this leakage is burnt to support the lira, with Turkey still needing a fresh $60bn to rescue the parlous reserves situation of its central bank.
Money is flowing on to the central bank's balance sheet from exporters, but its gross reserves remain flat. As a result, the USD/TRY pair is still drawing a straight line below the 14-level. The rate was fixed at 6.80 in the summer months of 2020. The magical fixed rate was 5.85 in 2019.
Each of the regime’s FX rate-fixing adventures ends in tragedy when the palace is told that there are no more reserves left to burn.
Berat Albayrak, Erdogan’s son-in-law who served as finance minister until the smoke coming from the reserves caused too many heads to turn, is known to some observers as the patent-holder when it comes to fixing the exchange rate while applying a floating rate regime. “A spectre is haunting [Turkey’s economic management], the spectre of [Albayrak].”
The USD index (DXY) has been on something of a dance, while the USD/TRY pair remains undeterred. The USD index saw the 97s during the last days of January, but sharply fell into the 95s on February 3 after the European Central Bank (ECB) kept its policy rate on hold at zero and the Bank of England (BoE) hiked its policy rate by 25bp to 0.5%.
On January 26, the US Fed said that it would cut its monthly net money printing volume by $30bn to $30bn in February from $60bn in January.
It plans to zero the net money printing in March. The previous schedule, released in December, suggested zero in April rather than March.
Fed Governor Jerome Powell’s press conference brought the real sensation:
· The Fed may hike its policy rate at its next meeting, to be held in March.
· It may begin reducing its balance sheet later this year after the rate hikes begin.
In December, the Fed governors anticipated the delivery of three rate hikes in 2022 that will bring the policy rate up to 0.75-1.00% from the current 0.00-0.25%.
On March 16, the Fed’s open market committee will announce the results of its next meeting along with updated projections from the governors.
At end-2021, annual CPI inflation in the US reached 7%, up from 1.4% in January 2021.
Five-year credit default swaps (CDS) on Turkey have been hovering in the 500s.
On Turkey’s foreign policy front, Erdogan has shown some discipline, not causing Joe Biden or Uncle Vlad any bother. A Russian invasion in Ukraine will create only a limited speculative market fluctuation in Turkey.
In Turkish society, tensions remain high due to booming prices and hunger issues.
Poverty Index = Inflation + Unemployment rate