To our surprise, this year’s financing is at stake !

The omnibus bill introduced to the Parliament yesterday shows us that the public sector is in desperate need of strong financing, which means 2019’s financing needs haven’t fulfilled yet as opposed to claims.

Freshly introduced to the Turkish Parliament, this legislative proposal interestingly coincided with the removal of Central Bank chief. It hasn’t made all the headlines yet, but this manoeuvre will be discussed by everybody soon. Removal of Turkish Central Bank head and the bill proposal I just mentioned above will inevitably bring heavy pressure on exchange and interest rates.

To be honest, these decisions issued right before the CBRT’s Monetary Policy Committee meeting on July 25 have increased market stress. Nevertheless, financial sector strongly expects a considerable cut in interest rates. Let me get into details before tackling the financial challenges facing the Public Sector:

As I’ve mentioned in my previous reports, if we are to expect that policy interest rate and the next year’s inflation rate will hit around 24% and 12% respectively, we should admit the fact that a real interest rate of 12 bps is way too high. People get easily confused as some financial commentators miscalculate the real interest rates. To get the real interest rate, they subtract the most recently released annual interest rate from the current policy interest rate. However, the annual interest rate indicates the total revenue at the end of a 12-month period while the recently released inflation rate shows the price hikes over the last 12 months. Major calculation mistake indeed…

“Public Sector is in major need of funding…”

The real interest rate Turkey offers is way too high under the current circumstances. Considerably incompatible with inflation expectations, the reason why the real interest rate keeps on rising is the increasing risks and never-ending volatility in exchange rates. Turkey must decrease its policy interest rates and bring forward a decent narrative in order to improve its financial situation. Obviously, the removal of Central Bank chief cannot be a part of a desired image.

I talked to the representatives of companies and investors from Gulf countries on Sunday night. “We want to invest but we do not have enough courage to do it because we don’t have any idea what might just happen” they all said in unison. So, I told them that the VW Group considers a new car plant in Turkey. “We’ll only believe it when we see it” they responded. So, what we need to do is to be patient and perform works that seem appealing encouraging to foreign investors. Chief among them is transparency. We have to accept the fact that foreign investors do not dare to invest in Turkey because of ever-changing laws and regulations. It looks like the removal of Central Bank chief has increased investors’ concerns.

Speaking of ever-changing regulations, the new tax bills introduced to the parliament yesterday show that the public sector is in desperate need of funding. Yesterday, I strongly emphasized that Turkish Parliament must act as the only authority to implement new tax regulations as it is illegal and unconstitutional to pass new tax proposals into law through Presidential Decrees. Accordingly, I’ve previously notified the relevant authorities of the fact that it is legally debatable to issue a Presidential Decree to impose taxes on foreign exchange transactions.

But this time, they’re doing it right. The members of Turkish Parliament will draw up a tax bill and put it to the vote, which is the legally right thing to do. On the other hand, it has become obvious that the public sector is in major need of funding. Now everyone knows that the previously issued “Relax! This year’s financing is in the bag” statements weren’t true at all.

I hope some of you took my “Go grab the opportunity” advice I gave last week when exchange rates tended to fall.