10th June 2015
Jan Dehn, head of research at Ashmore discusses Turkey, who voted for pluralism over a single strong leader and China which launches a market for certificates to link policy rates more directly to deposit rates…
Turkish voters decided that a single party majority government in Turkey under a powerful President Erdogan with executive powers was not their cup of tea, at least not now. Erdogan’s ruling AK party obtained only 41% of the votes, or 258 seats in parliament, which is too few even for a simple majority (276 seats). The big winners were the nationalist right-wing MHP, which collected more than 16% of the votes and 81 seats in parliament and the Kurdish HDP, which secured nearly 13% of the votes and 79 seats in parliament. The Republican Peoples Party (CHP) secured 132 seats. The outcome effectively ends President Erdogan’s dreams of an executive presidency and shifts power back to the Prime Minister, who will be most closely involved in forming and maintaining a working coalition, unless the AK party wants to try to go it alone with a minority administration. The outcome increases odds of another election soon and reduces the likelihood that the package of economic reforms the government has been promising in the past 12 months will be enacted.
As such, this election outcome may be good news for democracy in Turkey, but it will be received with scepticism by febrile investors. Borsa Istanbul, Turkey’s main stock exchange, opened down 8.2% on 8 June, while USDTRY rose to 2.77 (from 2.66). In response, the central bank on Monday took steps to increase access to USD liquidity by cutting USD interbank deposit rates to 3.5% from 4.0% and EUR interbank deposit rates to 1.5% from 2.0%. Official final results will take a few days, but the political landscape could remain unclear for some time. Prime Minister Ahmet Davutoglu, or another person chosen by President Erdogan, will then be asked to form a new government, which must be put before a confidence vote in parliament within 45 days. Between now and then, let the political horse-trading begin!
In yet another step on China’s rapid journey towards capital account liberalisation, the PBOC announced a new certificate of deposit (CD) scheme under which banks and cooperatives can issue large CDs with up to nine different maturities (1 month to 5 years). In a further step towards capital account liberalisation, the onshore repo market will also be opened to offshore financial institutions. The new CD market will be important as collateral in repo transactions and will trade with both fixed and floating rates, benchmarked to the Shanghai Interbank Offered Rate (SHIBOR). SHIBOR is also the benchmark money market rate. The CD market marks a big step towards removal of the cap on deposit rates and directly links deposit rates with money market rates. As such, this particular liberalisation plays a critical role in the transmission of monetary policy.
As China turns to domestic demand led growth the temperature of the domestic economy will increasingly be regulated via interest rates, rather than exchange rates. This is why interest rates are being liberalised and why bond market development – notably the muni bond market – is so important. Higher consumption will also increase imports, so to finance the current account China is liberalising the capital account too. To ensure that financial flows into China are stable and long-term in nature, CNY will be made a global reserve currency in the near future. China’s reforms are well-thought through and the timing is immaculate: central banks in the countries that today supply more than 95% of the world’s reserve currencies are pursuing policies that will ultimately undermine their currencies, including zero interest rates, money printing, failing to deleverage and unwillingness to reform. In other news, HSBC’s services PMI in May rose to 53.5 from 52.9 in April, while the trade surplus rose sharply to USD 59.5bn in May from USD 34.1bn in April. After a sharp dip in China’s trade surplus in March due to season effects surrounding the Chinese New Year, the trade surplus is now back to near all-time highs. The main driver was weaker imports, though exports were also stronger than expected.
Import demand is slowing as China liberalises interest rates and undertakes dramatic reforms of the capital account, local government and other sectors of the economy.