I’ve answering people’s questions about the recent developments in Turkey and in our surrounding region as well since the first day I’ve met the scorching heat in Islamabad. Some even called me from Turkey to ask me specifically the following question:
“Why are exchange rates are dropping? Should we expect good news?” Let’s see together what’s been going on and make a reasonable conclusion out of it.
Before I started my journey towards Islamabad, the United States has still exerting pressure on Turkey to make it cancel the S-400 deal. It’s still a bit early to predict what the outcomes this situation will bring on monetary and capital markets. However, it wasn’t very nice indeed that Turkey hasn’t received any other call for F-35 pilot training.
By the way, Turkish Treasury announced that two new tenders are on the way. As Turkey still remains at an acceptable public debt to GDP ratio according to the convergence criteria (or Maastricht criteria), I do not think that Turkey’s borrowing level will cause too much of a problem. As I’ve always said, we must endure the cost and grab the opportunity to get the needed financing while we still can.
Let’s tackle why Exchange Rates had sharply fallen during the holiday before we move on to the next step and inquire whether or not there are actually good news. According to some, US-Turkey relations have been softening. But, the recent developments indicate the exact opposite. There are other rumours as well, which I intend to reveal in tomorrow’s report. Still, let me share this analysis of mine with you:
– Fluctuations in exchange rates are mainly caused by political and diplomatic developments
– And the main trend in exchange rates is almost always determined by the economic circumstances
Although the roots of the economy seem like they go very deep, unfortunately, the recent slowdown in economic activity doesn’t go unnoticed. Here’s another observation for you:
“Are zeros coming back?”
Sadly, prices on tags have increased from two digits to three digits. The news I receive from Turkish vacation spots and my very own observations tell me that four-digit numbers are now dominating any service you may think of. As a matter of fact, this situation clearly shows that both inflation and the high cost of living are intertwined in a chain reaction.
An importer said, “I don’t know the real cost of the electricity I’m using. I don’t know the amount of money I should pay when clearing customs for my products once they arrive in Turkey. I don’t know whether I will ever get a VAT refund” These were his reasons for increasing the prices. If people’s confidence is ruined, their future expectations will be ruined along with it. And when there’s decrease in demand, the prices won’t go down as you might expect. On the contrary, producers of goods and services might hike prices since they would still have rents, interests and wages to pay.
Inflation would only fall down if people’s negative expectations are turned into positive ones. So, as you can imagine, government’s first deed must be to improve expectations.
When managing expectations, refusing to make negative developments seem like positive ones is as much important as preventing bad things from seeming worse than they are actually are. “Plausibility” is the precondition to an effective expectation management.
We surely must ease people’s concerns as to whether or not the zeros which have been successfully removed years ago will come back. If we fail, each and every one of us will start to shape their product and service prices based on negative expectations, thus accelerating our return to a multiple-zero life. I just hope my advice will not go in one ear and out the other.
Tomorrow’s report will be focused on Pakistan and the current situation in the region as well as the latest CBRT decision.