Bitter pills: Erdogan’s possible remedies for Turkey crisis

There are some possible fixes, but Erdogan will have to swallow a very bitter pill. (Presidential Press Service via AP, Pool)
Updated 19 August 2018
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Bitter pills: Erdogan’s possible remedies for Turkey crisis

  • The lira closed a volatile week of trading at just over six to the dollar
  • Even before the crisis broke, economists were urging Turkey to raise interest rates sharply

ISTANBUL: The crash in the Turkish lira sparked by US sanctions has left President Recep Tayyip Erdogan facing the biggest economic challenge of his one-and-a-half decades in power.
The lira has recently clawed back some of its losses, but economists say Turkey still urgently needs to address imbalances in its economy and avert a full-blown crisis.
The fragility of the currency was highlighted again on Friday when Standard and Poor’s and Moody’s both downgraded Turkey’s debt ratings within hours of each other.
The lira closed a volatile week of trading at just over six to the dollar, off the lows of over seven earlier in the week, but still sharply down from the start of the month, when it had been changing hands at under five to the dollar.
Economists say Turkey must act to prevent risks spreading to the European and even global economies.
Erdogan has a number of mechanisms at his disposal. But they could prove bitter pills for the Turkish strongman to swallow.
Even before the crisis broke, economists were urging Turkey to raise interest rates sharply to prop up the lira and rein in inflation.
But Erdogan — who sees his overriding priority as boosting growth — adamantly refuses, with economists worried that the nominally independent central bank is firmly under his control.
With its hands apparently tied when it comes to raising the headline borrowing rate, the central bank has provided banks with more liquidity, while also quietly using a mechanism that allows de-facto rate increases on a day-to-day basis.
William Jackson, economist at Capital Economics in London, said that while “the sense of acute crisis” had faded, “policymakers only really seem to have done the minimum needed.”
Financial markets are also skeptical about Erdogan’s ability to resolve the current crisis, especially after he named his son-in-law Berat Albayrak as finance minister last month.
Erdogan’s unorthodox beliefs have not helped, with the president repeatedly baffling markets by suggesting that low interest rates are needed to bring down inflation.
Moody’s said Turkey lacked a “clear and credible plan” to deal with the challenges while S&P said the response from Ankara so far had been “limited” despite the mounting risks.
Albayrak on Friday insisted that bringing down inflation was a priority for Turkey. But markets want to see actions rather than words.
“Turkey’s economic crisis is far from over,” said Mujtaba Rahman, managing director for Europe at Eurasia Group, calling for a “credible program of fiscal consolidation and economic reform.”
Economists have long warned that Turkey’s high inflation, widening current account deficit and vulnerable banking sector harbored risks.
Nevertheless, the immediate cause of the current crisis is the detention for almost two years of US pastor Andrew Brunson and the ensuing sanctions from Washington that have sent the lira into a tailspin.
One immediate way out of the crisis would be to release Brunson from his house arrest. But this is far from certain, with Turkey noisily asserting the independence of its judiciary.
Another way could be to defuse the tensions with Europe that have mounted since the failed 2016 coup, and focus instead on the joint opposition to Washington’s unilateral trade measures.
The last week saw the surprise releases of two Greek soldiers held for around six months and the Turkey chair of Amnesty International held for over a year, moves bound to gladden Brussels.
These releases “were not a coincidence,” commented a European diplomat, asking not to be named.
In such a situation, the logical move for many countries would be to turn to the International Monetary Fund (IMF) for help. But Washington may not be too keen.
And this also appears to be a red line for Erdogan, too, who has repeatedly boasted that Turkey managed to clear all of its debts to the IMF by 2013.
Albayrak said Thursday that Turkey was not in contact with the IMF over a bailout and said Ankara was looking to attract new investments instead.
After hosting his ally the emir of Qatar earlier this week, Erdogan secured a pledge for some $15 billion of investment from the gas-rich emirate.
But according to Berenberg Bank economist, Holger Schmieding, the Turkish economy, the world’s 17th biggest, is far too important to be kept afloat with relatively small amounts of foreign money.
Many economists say that in the short term the most likely course for Turkey will be to try and weather the crisis without resorting to rate hikes, major political concessions or radical economic reform.
The central bank’s attempts last week to prop up the lira suggest it is trying micro-manage the crisis rather than find more comprehensive solutions.
Jackson at Capital Economics said “policymakers will try to muddle through with a more heterodox approach for as long as possible,” forecasting the lira faced further declines in 2019 and beyond.


Saudi Real Estate Refinance Co. plans up to $1.07bn sukuk sale this year

Updated 23 April 2019
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Saudi Real Estate Refinance Co. plans up to $1.07bn sukuk sale this year

  • The plan by SRC, a subsidiary of Saudi Arabia’s sovereign Public Investment Fund, comes as it prepares to purchase more home loan portfolios
  • SRC, formed in 2017, is also keen to tap foreign institutional investors for its debt sale this year

RIYADH: Saudi Real Estate Refinance Co. (SRC), modelled on US mortgage finance firm Fannie Mae, aims to issue up to 4 billion riyals ($1.07 billion) of long-term sukuk this year, its chief executive said on Tuesday.

The plan by SRC, a subsidiary of Saudi Arabia’s sovereign Public Investment Fund, comes as it prepares to purchase more home loan portfolios from mortgage financing companies and banks to boost the Kingdom’s secondary mortgage market.

SRC, formed in 2017, is also keen to tap foreign institutional investors for its debt sale this year, Fabrice Susini told Reuters in an interview.

“Our strategy is clearly to tap the market twice this year,” he said. “We are really looking at probably issuing something between ... 2 and 4 billion riyal that we may be issuing in two tranches.

He said SRC was looking at sukuk in the 10 to 15-year range, to help minimize refinancing risks. “Generally speaking we are trying to issue as long as possible,” Susini said.

He said the company was assessing whether it could also issue bonds in currencies other than the local riyal.

In March, SRC completed a 750 million riyal sukuk issue with multiple tenors, under a program that allows it to issue up to 11 billion riyals of local currency denominated Islamic bonds.

“The rule of the game for us is, like many projects across the Kingdom, attract liquidity from foreign investors,” Susini said.

He said SRC had spent 1.2 billion riyals from its balance sheet buying mortgages from local mortgage financing companies and provided liquidity to these firms.

It has also signed initial accords with several commercial banks to acquire housing mortgage portfolios.

Saudi Arabia’s housing ministry is targeting the mortgage market to reach a total value of 502 billion riyals by 2020 from around 300 billion riyals now.

The government wants to increase activity in the real estate market as it moves to revitalize the economy and is taking steps to reform the sector as part of its 2030 reform plan.

It has been working with developers and local banks to counter a shortage of affordable housing — one of the country’s biggest social and economic problems. Saudi Arabia wants 60 percent of its nationals to own homes by 2020, up from 47 percent in 2016.

The size of real estate financing relative to its gross domestic product is 5 percent in Saudi Arabia compared to 69 percent in the United States, 74 percent in the United Kingdom and 43 pct in Canada, the housing ministry has said.

“The goal of SRC in this market was to make sure that we will be able to refinance at least around 10 percent of the market in 2020, and 20 percent of the market by 2028,” Susini told Reuters.