Turkey, Argentina and Debt
Turkey and Argentina were like economic twins back in the 1980s. They shared many stories about the balance of payments, currency crises, and IMF conditionality. The twins diverged later, with Turkey seemingly outperforming its twin. But recent events brought them back into the same fold, and this time, Argentina appears to be in a more advantageous position.
May 2018 was an ominous month for both Argentina and Turkey. The Turkish Lira and the Argentinian Peso both experienced double-digit depreciation. Central banks in both countries raised interest rates. Rising current account deficits in the last three years, together with a high level of debt, led to double-digit negative YTD (year-to-day) returns in 2018. This is even more terrible, considering that the world is moving from quantitative easing (QE) to quantitative tightening (QT).
Turkey and Argentina got caught up into a taper tantrum with all the usual suspects for portfolio managers. The only difference is that Argentina’s debt is public, while that of Turkey is overwhelmingly private. The Argentine situation resembles the Turkey of 2001, while the Turkish situation is very much like Korea in 1997. That makes Argentina’s crisis easier to deal with, if you ask me.
Argentina is scheduled for presidential elections in October 2019, yet the country took the risk and asked the IMF for “exceptional access” resources. The IMF has already had an informal board meeting on May 18 and “demonstrated a willingness to make available ‘exceptional access’ resources to Argentina to restore market confidence and smooth the adjustment path” notes Stephanie Segal of the CSIS, a prominent think tank in Washington, D.C. This seems to have calmed markets down at the moment. In comparison, Turkey has not been able to provide any horizon to the markets yet, and the Lira is still sliding down with a potential to go further. Why?
I see three reasons. First, President Macri of Argentina came to power in 2015 and has a clean slate. He is not necessarily blamed for the fragilities of the Argentine economy. Second, he already has a program for fiscal discipline, and though too gradual, it demonstrates that Macri understands the problem. Third, the Argentine President has a close network of friends in the US, including President Trump himself. Note that the US is the largest and most influential shareholder in the IMF.
Contrast this with the fact that President Erdoğan of Turkey has been in power since 2002, the country has recently been racing away from fiscal discipline, practically has no central bank independence, and that President Erdoğan seems to have no friends in D.C. Erdoğan too, had elections scheduled for October 2019, but has had to re-schedule them for this month. Macri, on the other hand, must feel confident that he’ll be better off by late 2019.
Geography also complicates things for Turkey. Argentina has borders with Chile, Brazil, Uruguay, Paraguay and Bolivia. That’s definitely more peaceful than Turkey’s neighborhood: Syria, Iraq, Iran, Azerbaijan, Armenia, Georgia, Greece, Bulgaria, as well as a very active Russian presence on every one of those fronts.
There is also reason to think that Turkey’s neighborhood is going to be even less stable in the years to come. This is because many of Turkey’s most combustible neighbors are oil and gas exporters.
With advances in biotechnology, nanotechnology, information and communication technologies, there won’t be as much global demand for petrochemicals. This means structurally lower oil prices, which will disrupt the business models of these oil exporting countries, many of which are rent-distributing fiefdoms rather than nation-states. Their ability to manage such a complex transformation process is highly questionable, at best.
There are certainly security factors to consider in Latin America, but Turkey’s neighborhood is different. It is a place where geopolitical factors of the highest order are in play, and need to be factored into economic and social calculations. In coming decades the neighborhood will be interesting in all the wrong ways. This could be turned into a very valuable asset for Turkey, if Ankara manages to think about the issue strategically. If not, we too, will continue to be more and more interesting.
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