Thursday, July 23, 2009

More on Monday's Hurriyet column: A false sense of fiscal responsibility

The one-sentencer below, from a recent research note on Turkey, illustrates what I meant when I said the government was providing a false sense of fiscal responsibility with the latest tax hikes.
Furthermore, Turkey’s fiscal backdrop seems to be moving in the right direction with the recent measures and that makes us more bullish.
I hate repeating myself, so please have a look at Monday's column to see why Turkey's fiscal backdrop is not moving in the right direction. An article of similar tone appeared in the FT today, with the title IMF hopes push Turkish lira to year high. Here are some excerpts:
The Turkish lira hit its highest level so far this year on Thursday as hopes rose that government spending cuts would push the country closer to a loan deal with the International Monetary Fund. The Turkish government is working on a number of measures aimed at unwinding fiscal policy that sent its budget deficit soaring. The IMF, which is in talks with Turkey for a new loan deal worth up to $45bn, has called for controlled spending, pointing to budget deterioration. Shahin Vallee at BNP Paribas said there was a widely held assumption in the market that a deal would be struck in the autumn between the IMF and Turkey after the summer recess. “In any case the need for an IMF programme in Turkey is waning as the recent pick-up in risk appetite has boosted emerging markets,” he added. The rally in equity markets over the last four months has boosted emerging market currencies across the board as rising risk appetite has prompted investors to abandon the relative safety of the dollar in search of yield. The lira rose to a high of TL1.4780 against the dollar, its strongest level since November. This took the currency’s gains against the dollar so far this month to 4 per cent and represented a 23 per cent rise since the start of the rally in equity markets in March.
Despite the title, the article notes that the latest bout of risk appetite, especially from yield-hungry Japanese investors, is behind the rally in EM assets. I found it interesting that FT, which I usually trust for accuracy, mentions this as sort of a footnote after elaborating on the Turkish fiscal/IMF story. If anything, Turkish assets joined the rally later than most peers. But there is nevertheless some of the FT story in play as well.

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