As we try to get over the shock of Monday, I think it’s still too early to make a loss assessment.
On Monday, US stock markets posted biggest falls since 2008 financial crisis. And the reason lying behind this decline is obvious: The fact that the most of the US companies operate their manufacturing plants in China may leave store shelves empty, which means American companies may see their profits shrink soon.
Not only the United States, but 7 developed countries as well are facing virus-led financial threats. Many Japanese brands, Toyota in particular, have halted production in China. This situation right here shows that Japanese economy, which has already shrunk by 7.1% in the fourth quarter, may get hit by another shock. Yesterday, Germany announced first deaths from coronavirus. As for Italy, the country Italy records highest toll from the virus.
Meanwhile, numerous meetings, conferences, all sorts of events that require large attendance are being cancelled all over the world, not because coronavirus fears, since Coronavirus mortality rate is about 3.5%, compared with roughly 10% for SARS. Everyone is afraid of being quarantined by the coronavirus. If this happens, an infected person must be kept under observation for at least 14 days. Unfortunately, quarantine centres are not 5-star hotels. Everyone is trying to survive under difficult circumstances. Take a look at my latest video on my YouTube channel for further insight into this particular issue.
“Fear does not stop death…”
This week, I was scheduled to speak at an International Meeting in Istanbul which would be held for one of the world’s most valuable brands. Sadly, it was cancelled. When I asked the organisators whether there will be international participation or not, they told me that international invitees won’t be able to attend the meeting. Apparently, everyone is afraid of being moved to isolation and not being able to return home. Who can blame them? In the meantime, there are talks underway for temporarily shutting universities due to coronavirus. Government may shut primary, secondary and high schools in event of a coronavirus outbreak in Turkey.
At this stage, it seems more and more likely for the Fed to cut rates again as CBRT may push rates to single digits. I don’t think that any central bank governor will care about the inflation under these terrible circumstances. The only difference between Turkey and the rest of the world is that we are using a dual monetary system. On other words, both TRY and USD are widely used in Turks’ daily lives, and maybe a little bit Euros. Developed economies amplify money and fall into the liquidity trap, but here in Turkey, things may transpire a little bit differently. People may want to buy more and more foreign currency what interest rates are kept low. Or even worse, they might get more interested in the real effective exchange rate because of their lack of trust in the system. This situation may not always yield “soft” results as the recent rise in FX deposits. The FX rate shock of 2 years ago may happen again, but this time more violently.
Maybe that’s why Turkey’s CDS premiums reached a value of 390 from its January value of 238. We are going through a process where we must keep our cool and reconsider our operating model.
Maybe in the process, we might be able to come up with a strong strategy for producing intermediate goods in Turkey. Perhaps, we can create a brand new model in loan/incentive practices, acknowledging that Turkey’s high dependence on imports not only increases its current account deficit but it also endangers the production. Accordingly, it would be much wiser of financial institutions and exporters to “be pickier”.
