Marrakesh - the Turks were the talk of the town

The new Turkish economy team were the talk of the town/star performers at the IMF AGM last week in Marrakesh. Indeed, one of the only good news stories in what was an almost unrelenting negative drum beat of international crisis/challenges/problem - war in Ukraine; war between Hamas and Israel, US political dysfunction, numerous EM debt crises, de-globalisation, climate change, need for reform of MDBs/IMF, higher US and global rates needed to fight inflation (higher for longer) and ultimately lower global growth and trade autarcky, et al.

Minister Simsek, Governor Erkan and deputy governors Akcay, Karahan, et al performed superbly, and sent a pretty convincing message of a sustained return to orthodoxy.

I reckon they must have done a dozen or more investor meetings, likely meeting several hundred international investors in the process.

The message was clear cut, that inflation is the problem, they are acting, and determined to act, but given the macro financial alchemy they inherited it is complicated, and they will need some time. The macro-prudential mix they inherited is toxic, and will take time to unwind, but in the interim, they can use it to their advantage to selectively demand manage the economy to rein in on inflation and bring improvements on the current account.

They noted the hikes in policy rates delivered already and signalled that they are prepared to do more.

Inflation is though still expected to head higher due to the inflation already baked in from the post election devaluation and tax hikes which were essential to rein in a budget deficit which had been on track to hit 9% of GDP. Expectations are that inflation will peak at 70-75% by May 24' but should then come down markedly with base effects. The assumption is also that policy will be further tightened after local elections in March, and they have a chance to get inflation down to a 30 handle by the end of 2024.

Investors I spoke to after the meetings were universally impressed with the team - no doubt from anyone that this is the Turkey economy A+ team. But the concern was that perhaps the problems were just too large even for the A+ team.

Concerns really focused on the exchange rate, and how the authorities stop a never ending exchange rate-inflation spiral against the context of a still large current account deficit, higher energy prices driven now by middle east risks, plus continued inflation pressures undermining competitiveness, and also weak demand conditions in Europe, plus knowledge that the CBRT needs to rebuild FX reserves.

The message from the CBRT seems to be that trust in them as policy makers and their initial actions, give them a credibility premium and this should see inflation expectations moderate and with it inflation hedging in terms of reduced buying imports and gold. Reining in the gold deficit could easily half the current account deficit. There also seemed to be a willingness to allow real FX appreciation as a key anchor/driver for inflation to push lower. The message seemed to be that Turkish industry needs to refocus on competitiveness and drive forward with productivity improvements as the days of waiting for devaluations to help them maintain competitiveness were now gone.

Obviously the question around their stay in office - the "Agbal" factor was constantly mentioned as a concern by investors. They came across as much more assured in terms of their confidence in their mandate and they seemed to have managed expectations in society and the political leadership about the scale of the challenge (inflation has not peaked) and that its a hard slog ahead. It is encouraging though that I think Turkish society, and the banking sector, and even the media seem to have got behind the team - there is recognition that inflation not growth is the number one challenge/problem and that it is going to require hard policy choices, and a period of painful adjustment to kill the inflation dragon. On the productivity improvement front I think the message from Simsek in terms of re-engaging the EU on the accession process is important - no one is talking about Turkey joining the EU any time soon, but better trade relations (new Customs agreement?) will encourage more trade, investment and financing from Europe which has to be good for Turkey, and Turkish business.

I think this team will succeed.