Due to widespread protests in Istanbul, CFA Institute canceled administration of exams as a precaution for candidates. Such candidates are entitled to reimbursement for the cancelled exam or to sign up to take the exam next year at no additional charge. This recent event is just an example of how unrest is affecting Turkey.
According to Morgan Stanley (NYSE:MS) Stanley analysts, social unrest, low interest rates, and a sharp depreciation of the currency could drive inflation higher in Turkey. So far, inflation has been below expectations, as shown by May’s Turkish headline CPI of 0.15 percent month over month. However, the CPI may be derailed as low interest rates continue to drive flows out of the Turkish lira as investors seek a better risk/return combination. Actually, foreign investors trimmed their positions in Turkish assets by $453 million within the week of May 17 through May 24, according to Burgan Securities. Nonresident investors reduced net positions in money market funds by $1.1 billion between May 17 and May 24, bringing net outflows since mid-April to $7.1 billion. Year to date, inflows have been reduced to $1.9 billion. The outflows in money market funds had been partially offset by inflows into local government bonds and equities by foreign investors, Burgan Securities analysts added.
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Morgan Stanley’s Forecast For Turkey
Morgan Stanley (NYSE:MS) analysts are keeping their forecast of year over year Turkish CPI at 7 percent. The lower than expected May CPI reading was primarily due to food prices falling. This drop may reverse any time, driving prices higher. Other components of the CPI continue to follow usual seasonal patterns. The Turkish lira has already depreciated, the local stock market has declined and yields have increased. If the currency continues to depreciate and investors continue to pull away money from Turkish asset markets, inflation will probably increase, in Morgan Stanley’s view.
The Central Bank of Turkey (CBT) has lost some flexibility to respond to inflationary pressures, as interest rates are very low. Turkish central bankers have come up with a Reserve Option mechanism to help stabilize interest rates but this tool has not been tested in the markets. The Reserve Option is the option to hold FX or gold reserves in increasing tranches in place of Turkish lira reserve requirements of Turkish banks. The premise is that holding reserves in other denominations will mitigate adverse effects of capital flow volatility on the macroeconomic stability of Turkey.
In Morgan Stanley (NYSE:MS)’s opinion, if inflation continues to rise and the Turkish lira continues to devalue, the new Reserve Option mechanism may be needed. So far, policymakers have done verbal interventions indicating readiness to tighten liquidity and control currency devaluation if warranted. Impact of this intervention was temporary, as weakness in global asset prices and protests in Turkey erased stabilizing effect. Morgan Stanley concludes that the most effective tool for policymakers may be the widening of the interest rate band beyond the 6.5 percent ceiling as opposing to using the untested Reserve Option mechanism.