Paul Mcnamara on the Problem With Turkey, and the Attempt To Save the Lira

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal. Unfortunately, my colleague Tracy Alloway is out today, so it will just be me, but I'm very excited nonetheless about this episode because we are going to continue speaking about one of the more interesting and complicated, or at least seems complicated, stories developing right now in markets, and that is the situation in Turkey. And if you haven't already, a couple of weeks ago, we published an episode with the economist Lütfü La Bingol, based in a bank in Istanbul, basically walking through some of the measures that the Erdogan government has taken recently to stabilize the lira. And of course, the lira had a pretty terrible 2021

It feels like, as we said on that episode, that every nine months, every year, every year and a half, there's a pretty big episode in Turkey where the currency plunges and the government engages in seemingly unorthodox monetary policy. Nonetheless, none of it seems to have worked. Inflation is extremely high. And so the argument is, or the attempt by the government is to discourage domestic savers from moving their money into dollars and to hold their money in lira. So far, this has been a goal for a while. Turkey is a heavily dollarized economy. By and large, though, nothing has worked. So I would encourage people to listen to that episode for a discussion of the mechanics. But of course, anything new is bound to be very controversial and there's a lot of views and a lot of skepticism about whether anything will improve with the new measures.

And so we want to continue on the topic. And of course, in the last episode, we spoke to an economist at a Turkish bank.

But this time we want to get the perspective that's a little bit more international from the international investing community. And I'm extremely excited about our guest. He's been on the podcast two or three times in the past, often helping us understand what's going on in EM.

And I think we've even talked Turkey specifically before, maybe in 2018 or 2019 Nonetheless, very excited to welcome back to the show, Paul McNamara, he's an investment director at GAM, longtime specialist in emerging markets. And so we are going to dive right in. So Paul, welcome back to Odd Lots.

Paul McNamara (2:49)

Thanks very much.

Joe Weisenthal (2:50)

Before we even get to the current measures and the current mechanisms that the government has put in place to attempt to stabilize the lira, how would you characterize the long-term issues facing the country? Why is it in your view that we seemingly come back to Turkey in particular, I don't know, every year or every year and a half during some episode of a high inflation and extreme currency volatility?

Paul McNamara (3:20)

It's something that tends to be particularly true of countries which have a habit of getting themselves into trouble. Turkey isn't remotely in as much trouble as Argentina, but the mindset there is the same, is that if you know a country is prone to 15, 20% or more corrections in the currency to overnight huge rises in interest rates or big drops in bond prices, you tend to react much faster. And this goes as much for people with a bit of money in the bank. Do they switch their money from liras to dollars or back again, or take their money out of the bank?

When you get this much volatility, it kind of creates its own volatility because people feel the need to react much faster. And just that willingness to react more quickly kind of creates, sort of enhances the volatility. So you get into this kind of volatility promoting spiral.

Joe Weisenthal (4:17)

Now, how much of this spiral would you say is a function of say domestic institutions? And of course, people perceive the Erdogan government to be engaged in, I would say, highly unorthodox views of how monetary policy works, lowering rates, blaming high rates for high inflation, et cetera. How much of this spiral is sort of the government's disinclination towards more orthodox policies versus sort of more behavioral explanations on the part of Turkish savers and their disinclination to hold Lira? Like what is, why in particular does Turkey seem to exhibit this doom loop?

Paul McNamara (5:00)

I mean, I think it's really interesting because it's kind of unusual to have a crisis which is largely voluntary.

It's not like you have to do some sort of thought experiment, that what would be the counterfactual if Turkey had higher interest rates. Because we know that, that before President Erdogan sacked Mr. Akbal, the previous head of the central bank, we had much higher interest rates and we had a lira that had been appreciating solidly for a couple of months. So in terms of the trigger for this particular situation, it's entirely, I think, on the shoulders of the government. That they decided that they were going to play games, I think is maybe a little bit casual, but they decided that they could conduct a complete experiment in monetary policy. I mean, I think there are longer term reasons why Turkey has been particularly prone to this boom bust cycle. It's a country where the external deficit dips on a regular basis into deficit, into very substantial deficit. It's got much, much lower level of foreign exchange reserves than pretty much any of the other big EMs, except maybe South Africa.