Elections Are Over, Back to Reality…

The reality has never gone away but people thought their troubles would end with elections concluding. Now begins the uncertainty and it will last until we hear a statement from the Government.

 

In the meantime, the cost of living continues to go up, along with the current account and budget deficits. According to Türk-İş, the hunger threshold for a family of four living in Ankara increased by 2.2% in May, reaching TRY 10,362, while the poverty threshold for has risen to TRY 33,752. It has become almost impossible for households with only one member with a job to live on. The cost of living for an unmarried employee has also increased to 13 TRY thousand 440 per month. In short, it is not possible to bring inflation under control merely by hiking wages. What needs to be done is to attack the root causes of the inflation.

 

Now that the elections are over, we see that the USD/TRY exchange rate continues to soar from where it left off. It’s not so hard to guess that the dollar, which has increased by 5% in a month, will skyrocket even higher. Similarly, deposit and loan interest rates also keep rising. The whole country is waiting for the Government to announce the new cabinet and the possible economic model they will go for on Friday.

 

A very experienced investor has recently told me that the stock market will first go up and then its direction will remain uncertain for an indefinite length of time, which means whatever makes the index move will rise up until a certain level, leaving the future unknown. Everyone wonders what the new economic model will be like, since it will determine the fate of interest rates and foreign exchange rates.

 

As Turkey’s trade keeps growing, the business world is worried about the fact that exports are falling faster than imports. Under the current situation, the economy slows down while the current account deficit continues to increase.

 

Obviously, there is a cure to treat all these problems. This cure involves a gradual return to free market economy, moderate but determined rises in policy rates, and controlled steps to reduce the cumulative stress in the foreign exchange market. I think the Government is currently handling the exchange rates but it is likely that they will not do anything about the policy rates, at least not before the local elections. If the Central Bank and BRSA continue to make it even harder for people to take out loans, both economic growth will slow down and inflation will rise further. To prevent problems from becoming unmanageable, the Government should either focus on reducing inflation, therefore, allow interest rates to increase, or focus on growth, and increase the rate of monetary expansion to stimulate more favourable credit terms. “You don’t need to keep loan rates low. Just allow me to take out the money I need. And I’m willing to pay the price for it”. This is the common voice of borrowers. I hope they can have their voices heard.

 

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