Aurelia Butler

Turkey’s presidential election run-off takes place this Sunday with the incumbent, Recep Tayyip Erdoğan, likely to win the election. He has not left victory to chance, practising monetary and regulatory manipulation right up to polling day to delay an all-too-possible financial crisis till after his return to office.Erdoğan has subverted monetary policy for more than a decade now by leaning heavily on the central bank to hold down rates despite rocketing inflation, which hit a 24-year high above 80 per cent last October. He has tried to relieve the inevitable downward pressure on the exchange rate with an increasingly baroque series of interventions. Last week, it was revealed that Turkey’s gross foreign exchange and gold reserves dropped by 15 per cent in the six weeks leading up to the first round of voting on May 14. Net of borrowing from banks, the reserves are perilously near zero.Among other expedient fixes, his government has tried to stop investors fleeing into dollar-denominated bank accounts by compensating holders of lira-denominated bank accounts against falls versus the dollar, thus building up dollar liabilities for the public sector. Most emerging market governments have tried to reduce dollar-denominated liabilities — India and Brazil’s sovereign debt is now almost entirely in local currency — but Turkey’s have been rising.Yet despite monetary irresponsibility from an increasingly autocratic president, a growing culture of corporate cronyism and the flaws of governance evident in the response to the recent earthquake, Turkey has proved — thus far — to be a strong enough trading economy to weather self-inflicted damage.It’s interesting to compare Turkey to Brazil. Around the turn of the millennium, the financial markets drove both countries off unsustainable currency pegs. Both then avoided a damaging debt default via tough IMF-backed fiscal tightening programmes conducted by heroic finance ministers, respectively Kemal Derviş (who, poignantly, died this month a few days before the first-round election) and Pedro Malan.Since then, Brazil has stayed closer to macroeconomic orthodoxy. In contrast to Turkey, it has maintained a strongly independent central bank running tight monetary policy, mindful of the country’s history of hyperinflation.But Brazil has remained primarily an agricultural exporter vulnerable to fluctuating global commodity prices and uncertain demand from China. Turkey, whose per capita gross domestic product measured by purchasing power parity has risen to about twice Brazil’s, has a highly efficient manufacturing sector, boosted by strong foreign direct investment inflows. Its companies sell into the rich consumer markets of the EU, to which it is anchored by a customs union for industrial goods.Despite its eccentric monetary policy, the Turkish economy has delivered good growth, its per capita GDP rising from below 40 per cent of the OECD average in the mid-2000s to more than 60 per cent.Manufacturing is usually the best way for middle-income economies to reduce poverty on a large scale. In Turkey, the manufacturing sector was 22 per cent of GDP in 2021, more like an east Asian economy (China is at 27 per cent, Malaysia at 23 per cent) than Brazil (10 per cent) and India (14 per cent).But unlike the traditional east Asian pattern, Turkey’s manufacturing exports do not depend on undervaluing the exchange rate or suppressing domestic consumption. It runs a chronic trade deficit rather than a surplus. As veteran emerging markets analyst Karthik Sankaran notes, Turkey is exempt from the usual critique of the east Asian export-oriented model — prospering by currency mercantilism, sapping demand from trading partners.Turkey is fortunate in its geographical location next to the EU, which, together with the UK, buys about half its exports — and near the Gulf states, whose governments have helped bolster its foreign exchange reserves. And Turkey’s open trade regime, certainly towards the EU, is one of the areas that Erdoğan’s destructive economic antics have left relatively undamaged — a testament to the beneficial pull of the bloc’s economic gravity. (This is also exactly what Vladimir Putin feared was happening in Ukraine, prompting the 2014 annexation of Crimea.)By contrast, Brazil is a member of the dysfunctional customs union Mercosur and persists with goods tariffs in an attempt to protect its industry. India, even under supposed globaliser Narendra Modi, has also wrongheadedly raised tariffs to encourage domestic supply chains. Turkey’s standard applied non-agricultural goods tariffs at the World Trade Organization average 5.8 per cent, as opposed to 13.8 per cent for Brazil and 14.9 per cent for India.That’s the good news. The bad is that this model is now threatened by Erdoğan’s monetary misadventures. Volatile inflation and exchange rates and regulatory interference deter domestic and international companies. FDI has tailed off in recent years, and the economy’s convergence with other OECD countries has stalled since around 2015.As Sankaran notes, the economy’s underlying strength means Turkey could come through financial crisis and start growing relatively quickly. But resuming the country’s journey towards prosperity will mean Erdoğan backing off his financial and monetary chicanery. That’s a long way from a safe bet. There’s a lot of ruin in a nation, as the great economist Adam Smith said. Turkey’s current and probable next president seems intent on finding out just how [email protected] More

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Pakistan expects China to roll over more than $2bn in debt due next month, but is still bracing itself for other repayment deadlines that risk tipping the country into default.With a crucial IMF lending programme stalled, Pakistan has about $3.7bn in overseas debt due this month and in June against its current foreign reserves of just $4.3bn. Two senior Pakistani officials said Beijing had committed to help the country meet two crucial debt repayments in June worth a total $2.3bn by providing fresh funds immediately after Pakistan makes the payments. The refinancing of the commercial loans worth $1.3bn and a Chinese government loan of $1bn would help Pakistan avert immediate default, the Pakistani officials said.Beijing earlier this year already rolled over some loans to Pakistan. Chinese foreign minister Qin Gang also reiterated Beijing’s financial support for the country on a visit to Pakistan earlier this month.In a written statement to the Financial Times, China’s foreign ministry said Beijing would “help Pakistan to achieve stability”.“China and Pakistan are all-weather strategic cooperative partners,” it said. Several analysts said they expected the relief from China — one of Pakistan’s closest allies — to come through, but warned it would not remove the risk of default.“There’s no way that the Chinese . . . will walk back from Pakistan at this time,” said Uzair Younus, director of the Pakistan Initiative at the Atlantic Council, a Washington-based think-tank, referring to the June debt deadlines.

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But Younus added that a severe shortage of external financing had resulted in “economic shock going through the entire society”.Pakistan, which has long relied on lenders such as the IMF and China to finance its budget deficits, is trapped in one of the worst economic crises in its history.The collapse in foreign reserves, now only enough to finance about a month of imports, has led to severe import shortages. Record-high consumer price inflation — which hit 36 per cent in April — has eroded living standards and exacerbated poverty in the country of more than 220mn people.Central bank data shows Pakistan’s foreign debt has roughly doubled since 2015 to more than $120bn. The increase has been fuelled by rising commodity import bills, borrowing for projects including those that are part of China’s Belt and Road infrastructure initiative, and the fallout of the Covid-19 pandemic.The Pakistani officials said they expected to receive up to $400mn from foreign donors following pledges to finance recovery from devastating floods last year.But the country has for months been unable to resume a stalled $7bn IMF programme that many analysts say is a crucial first step to turning its economic situation around. Pakistan revised its growth forecast for 2023 on Thursday to just 0.29 per cent, down from 2 per cent and trailing the IMF estimate of 0.5 per cent.Prime Minister Shehbaz Sharif’s government has fiercely resisted some of the measures the IMF has demanded, such as tax increases and subsidy cuts. While it eventually agreed to some conditions, officials and analysts said the two sides had also clashed over how Pakistan should build up its foreign reserves.

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But many analysts say an IMF deal is crucial to restore investor confidence and would help unlock further financing from other international partners such as Saudi Arabia or the United Arab Emirates. They add that, with officials estimating that Pakistan needs to repay about $25bn in debt in the financial year that starts in July, the country will probably require further borrowing and potentially a new IMF programme if it is to stave off default.“The situation is extremely delicate. We are at the worst financial position in our history [in terms] of sustainability of balance of payments,” said Hafiz Pasha, a former finance minister. “This time we will need an extended arrangement with the IMF for restructuring and reprofiling of our debt.”Yet Pakistan’s political crisis risks throttling any chance of an economic turnround. Sharif’s government, with the backing of the country’s powerful military, is locked in a stand-off with former prime minister Imran Khan.Analysts consider Khan the most popular candidate ahead of national elections due by October. The former prime minister is on bail after being arrested this month on what he calls trumped-up corruption charges. Authorities launched a crackdown on Khan’s Pakistan Tehreek-e-Insaf party after violent protests by his supporters while he was in custody. Foreign officials have warned the political volatility risks distracting Pakistan from resolving its economic problems. While in Islamabad, China’s Qin called on Pakistani politicians to “uphold stability . . . so that [they] can focus on growing the economy”.

“Political stability is the prerequisite to overall stability. The optimistic scenario is Pakistan getting political stability in the next three months,” said Ali Farid Khwaja, head of Karachi-based brokerage KTrade Securities. “If they cannot deliver on political stability, then a default scenario looks more likely.”Miftah Ismail, another former finance minister, said deep economic reform would also be needed.“Pakistan’s viability at this point depends on magnanimity of its friends,” he said. “Radical solutions have to be adopted to widen the tax net and reduce expenditure to impress the outside world.”Additional reporting by Joe Leahy in Beijing More

SEOUL (Reuters) – South Korea’s central bank held interest rates steady for a third meeting on Thursday, as expected, after a 1-1/2-year-long tightening cycle and as both inflation and economic growth eased.The Bank of Korea announced its seven-member monetary policy board voted to keep its policy rate unchanged at 3.50%, without elaborating. Governor Rhee Chang-yong is due to hold a news conference soon.The decision matched the prediction from all 40 economists surveyed by Reuters. Most of the respondents forecast the next rate change would be a cut, probably during the final quarter of this year.The Bank of Korea started raising interest rates in August 2021 to tame inflation, well before the world’s other major central banks, and had raised them by a total of 300 basis points through January this year.The Bank of Korea also announced it has cut this year’s economic growth forecast to 1.4% from 1.6% forecast in February, while keeping this year’s inflation projection unchanged at 3.5%.Rhee has indicated on several occasions that the central bank’s growth forecast will likely be lowered.Asia’s fourth-largest economy has cooled on sluggish exports and narrowly averted recession in the first quarter. Inflation has slowed since peaking in July last year but still stands far above the central bank’s 2% target. Fresh data showed Thursday the annual producer inflation rate halved in April to 1.6% from 3.3% in March, touching its lowest in more than two years, underscoring a broad view of sustained easing of inflation pressure. More

Lawmakers in the chamber voted 372-108 to pass the main text of the bill on late Tuesday that is set to replace Brazil’s current spending cap, which has been breached several times in recent years to allow higher government spending.Federal lawmakers rejected all amendments that could alter the bill’s main text, and now the proposal will be sent and voted on at the Senate. Markets welcomed the overwhelming approval, with the Brazilian real strengthening roughly 0.7% against the dollar and interest rate futures trading down on Wednesday.”The actual rule is tougher than previous versions of the bill suggested,” Banco Original’s Chief Economist Marco Caruso said. “The 372 votes were also positive as markets might now start to think it will be easier to pass a tax reform”.Under the new fiscal rules, government expenditures will not be allowed to rise by more than 70% of any increase in revenue, with spending growth also limited to between 0.6% and 2.5% per year above inflation.If the goals are not met, expenditure growth will be restricted to 50% of revenue increases as a penalty.”It was an important victory for the country,” Institutional Relations Minister Alexandre Padilha said after the vote, in which Lula’s leftist administration managed to garner support from right-leaning parties to pass the bill.”This measure will allow for sustainable growth combining social and fiscal responsibility,” he added.The government expects the new fiscal rule to allow it to erase the country’s primary deficit by 2024, before achieving a primary surplus equal to 0.5% of GDP in 2025 and 1% of GDP in 2026.Finance Minister Fernando Haddad also celebrated the wide approval margin, noting it signaled the government must seek “balance” in future projects including a long-awaited tax reform expected to be voted on by Congress later this year.The rules will replace a more rigid cap on spending that limits growth in expenditure to the previous year’s inflation rate. “Passing the main text was a major step forward,” said Felipe Salto, chief economist at broker Warren Rena. “The framework has what is necessary to avoid a bad fiscal situation.” More

BENGALURU (Reuters) – Global stock indices will end this year higher than where they started it but most are set to be confined to ranges in coming months even as central banks approach the endgame for interest rate rises, according to Reuters polls of market strategists.Despite the drubbing in 2022 and starting the year on the backfoot, global stocks have recovered from March lows based on expectations that most central banks were done or nearly done with in some cases more than a year of raising interest rates.The MSCI global stock index, which fell more than 8.5% between Feb. 2 and March 15 following the failure of a few U.S. regional banks, has since recouped nearly all of those losses and is up about 9% for the year.Still, there is barely any improvement to the outlook for major indices at year-end compared to a survey taken three months ago before the turmoil. Year-end forecasts for 10 of the 17 indices polled May 10-24 have been downgraded.This suggests stocks are no longer a one-way bet in the minds of investors like they were for swathes of the last decade, in large part because there is little scope for central banks swooping in to cut borrowing costs any time soon. “Although monetary tightening has been a drag on equities over the past year or so, we don’t think the end of rate hikes means the stock market is set for big gains,” said Thomas Mathews, senior market economist at Capital Economics.Mathews added that “any hopes of a boost to equities from an end to monetary tightening will probably be dashed.”Among analysts with a view on what the dominant trend for stock indexes will be over the coming months, a two-thirds majority, 64 of 97, predict narrow range trading. Nineteen said they would rally and the remaining 14 predicted a correction.Manish Kabra, head of U.S. equity strategy at Societe Generale (OTC:SCGLY), noted the “fear of missing out” factor that has driven stocks in the recent past was no longer convincing, as there were multiple reasons to not load up on stocks and “we should see credit risks and bond volatility pick up again.”While there was no majority among 104 analysts who had a view on the primary drive for stock markets over the coming three months, two related responses, economic data (39) and monetary policy (27) were the top picks.Those were followed by company earnings (19) and other reasons (19).With central banks’ actions expected to have an outsized say over stock price movements, the European indices and the Nikkei which outperformed their developed and emerging peers were expected to shed the most by year-end.The STOXX index of the euro zone’s top 50 blue chips was forecast to fall about 2% from Monday’s close to 4,300 points by end December. The index is up 15.6% year to date.Britain’s FTSE 100 was predicted to end the year at 7,775 points, broadly in line with Monday’s close.Japan’s Nikkei 225 was predicted to drop 4% from 33-year highs, returning to the psychologically key 30,000 level by year-end.The benchmark U.S. S&P 500 index which lost over 19% last year, its worst annual performance since 2008, is up around 8% this year and was forecast to trade around current levels to close 2023 at 4,150.Brazil’s Bovespa and Mexico’s S&P/BMV IPC stock index were forecast to gain nearly 9.0% and 7.5% respectively by end-2023. Both countries’ central banks were widely expected to cut rates over the next 12 months.(Other stories from the Reuters Q2 global stock markets poll package:) More

While the ratings agency still expects lawmakers to reach a deal before an early-June deadline, it said that recent sparring over raising the debt ceiling had brought up risks of a potential U.S. default. “The brinkmanship over the debt ceiling, failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits and a growing debt burden signal downside risks to U.S. creditworthiness,” Fitch said in a statement.Fitch said that the government will log a deficit of 6.5% in 2023 and 6.9% in 2024, compared to 5.5% in 2024. The agency added that avoiding a default by unconventional means, which include minting a trillion-dollar coin or invoking the 14th amendment, would also be detrimental to a AAA rating.While Fitch emphasized on the low probability of a debt default, the ratings agency said that such a scenario would result in the U.S. being downgraded to a Restricted Default, and that debt securities affected by the default would be downgraded to a ‘D’- its lowest rating.Other securities with payments within the next 30 days would be downgraded to a ‘CCC’, and short-term treasuries maturing in the following 30 days will be downgraded to ‘C’.Still, the ratings agency said that the U.S. country ceiling would likely still remain at ‘AAA’, its highest rating, citing the reserve currency status of the dollar. The warning from Fitch comes as Democrat and Republican lawmakers spar over raising the $31 trillion debt limit, after it was reached in January. Republicans have called for spending cuts and more scrutiny over government cash aid, while the Democrats have pushed dollarfor raising the debt ceiling with few caveats.A downgrade of the U.S. rating would be the first by a major ratings agency since S&P Global Inc (NYSE:SPGI) cut the country to ‘AA+’ from ‘AAA’ in 2011, which was also over raising the U.S. debt ceiling. The move had drawn widespread criticism, and had also triggered sharp declines in global markets. Fitch has warned of potential U.S. downgrades consistently over the past decade, with a bulk of the warnings related to raising the U.S. debt ceiling and government spending. The dollar showed little reaction to the Fitch warning, while U.S. stock futures were mixed.  More

Payments NZ, which manages New Zealand’s core payment clearing systems said in a statement that from Friday, electronic bank payments made on public holidays and weekends can now go through on the same day, every day of the year.Previously banks could only send and settle payment transactions on business days. More