For Ankara, the hot money flow is constant

The Turkish government seems to be operating on the belief that the flow of hot money into the country is going to continue in the period ahead. It is clear that the recently announced medium-term roadmap is designed around this expectation.

When I discussed the aim of the roadmap with sources close to the government last week, I saw that they believe the U.S. economy will do poorly in the year ahead, so the Federal Reserve will maintain its appetite for money and risk. This would mean that our incoming capital flow will not stop. I also saw that because Turkey’s fiscal deficit is high, the government will stand by the unpopular precautions it brought about in the recent omnibus bill. However, there are different views within the government as to which social segment should have to shoulder the tax hikes.

There is a concern about losing economic prosperity and balances due to a loss of financial discipline, which is why the government has decided to avoid taking such a risk ahead of the three elections due for 2019. My impression is that the medium-term roadmap’s goal of growth hitting 5.5 percent over the next four years is an attempt to improve expectations. They also argue that the expansion expectation is realistic, saying national income numbers are actually higher than what the public assumes about Turkey’s expansion capacity.

Political concerns

When I asked about the hot money flow at a time when political conflict with the West is growing, I also saw that they expect relations - especially with Germany - to improve, even if the Fed does not increase interest rates. This means that they calculated their expectations based on the assumption that the hot money flow from the West will not be negatively impacted, and that Ankara will not be politically isolated in the period ahead. Another crucial topic we discussed was whether there will be additional cuts in spending. Although the sources did not go into detail about the cuts, they seem determined to slow new construction investments and vehicle purchases. They also suggested that there would be cuts for current expenditure.

Regarding the inflation target, they said the aim is realistic. However, they seemed less determined on this one; it was almost like they already know there will not be a serious fall in inflation with the current political strategies. I think Turkey’s economic policymakers are actually aware that the medium-term program outlook is optimistic. For example, take the currency forecast. The assumption for the end of 2018 is that it will be 3.90 Turkish Liras to the dollar, while the forecast for the end of this year is 3.63 liras. But we have already made it to 3.63 liras to the dollar.

Like the government, there are also market players who believe that even though the Fed has signaled rate increases, it will not follow through. However, there are strong indications that we are entering a phase in which the dollar will further gain value with the appointment of the new Fed chair, the start of interest increases, the ongoing geopolitical risks, and the U.S.’s expansive financial political incentives. These will weigh heavily for the remainder of the year. Taking into account current global expectations, the start of the military operation in Syria’s Idlib, the impact of ongoing clashes with the West, and all associated risks together mean that we should not be surprised if the medium-term program is revised before the middle of next year.