Nick rang a friend in the UK yesterday morning on a financial matter. His friend was doing a fine impression of Chicken Little, running around the office, waving his blackberry in the air and screaming “The sky is falling!” or rather “The markets are falling!” The world financial markets are once again in free fall as traders persistently and pessimistically insist that debt is contagious, which is an amusing concept, particularly if you pay attention to words and what they actually mean.
Out there in the wide world of the gossiping markets, where imaginary futures are hedged about with fences built on the strength of some arbitrarily decided credit rating, the sky is indeed falling and men in retro chic braces are saying it feels like 2008 all over again. Yeah, 2008 was a bad year; I remember it well, though not quite for the same reasons as the brokers with their head in their hands or up their own behinds – take your pick.
Here in Turkey the world wide recession hasn’t impacted in the same way that it has in other countries and the fear is more than the economy will overheat than fear it is retracting but we have to pay attention to the whole world and those of us who sit quietly, read a lot, look for patterns in behaviour and ignore gossip find these to be interesting times.
Over the last few weeks the Turkish lira has weakened dramatically against the major currencies meaning that those of us whose income is in sterling have more buying power. Yesterday the lira closed at 2.839 against sterling. The weakening lira is clearly an aim of the central bank who seeks to encourage exports and keep the economy growing and is worried that the European markets for Turkish goods will slow down as the euro crisis deepens.
The interest rates have dropped dramatically over recent years and are still creeping steadily downwards and the base rate was dropped again two days ago by a full percentage point whilst the spot rate for short term borrowing was raised. A low base rate makes credit more affordable for Turks whilst sending those less clear sighted expats, who know less about finance than I do about square leg bowling, into a panic and a major bitch fest and conspiracy spiral over how Turkey hates them and their savings.
If you combine both these factors, reduced interest rates and weakening lira you gain an understanding of what is happening and why and can see what Turkey is trying to achieve financially and it is nothing to do with the few thousand expats that litter its coastline.
Turkey is adopting what in financial terms is known as a dove stance. The opposite of a hawk stance a dove stance seeks to reduce interest rates so the economy will grow, consumer spending will increase and business’ can afford the credit to expand. In this specific instance Turkey also seeks to weaken the currency to make exports more attractive and therefore likely to increase.
The downside of a dove stance is inflation and imports becoming more expensive and this appears to be a risk Turkey is prepared to take.
As in all financial stances it is a gamble, the central bank in Turkey is carrying its dove across a tightrope between runaway inflation and an economy that overheats rapidly before plunging into recession.
Right now I think they have the balance right. The economy is growing although not out of control as the big increases of the first quarters of the year are levelling out. The lira has been artificially high for the last few years and if it trades as low as 3 to sterling that’s okay. I don’t think it will go that low, I think it will probably stabilise shortly, particularly when the central bank starts to sell off all the foreign exchange it has bought since 2009 and maybe it will even gain a little although this all depends on how the Euro zone chooses to manage its ongoing issues.
I think lowering interest rates whilst raising the spot rate makes sense as this makes structured borrowing more affordable and suggests long term sustained growth is the aim with short term emergency borrowing to manage crisis being penalised.
Right now, if I had a wodge of cash available, I’d be buying lira and then investing in gold bonds with a view to changing it back if the Euro self destructs, the lira strengthens and sterling becomes the only safe home in a crisis. If sterling goes down with the euro I’d still be happy in gold.
But that’s all fantasy because I haven’t got a large wodge of cash unless I sell a kidney, or Nick, and it’s easy to make recommendations with hypothetical money, after all that’s what bankers do.
Having now bored you all rigid with a tedious run down on Turkey’s financial strategy in the long hot summer of 2011 I’m going to go back to what I do best, cooking yummy food and writing soppy prose; I have some chicken to marinade and 15,000 words to tidy up on my computer.