Fuelled by an experimental central bank policy that has chased away foreign investors and eroded the lira’s value, Turkish inflation probably accelerated last month to a level last recorded in mid-1998.
Annual inflation probably rose to 83.5 per cent in September, climbing for a 16th month, according to the median estimate in a Bloomberg survey.
The jump comes at a time when central bank chief Sahap Kavcioglu has embarked on a series of interest rate cuts this year, making Turkey an outlier among global monetary authorities, most of which are aggressively tightening to control price increases.
Turkey’s central bank said in its latest forecast in July that inflation should peak somewhere between 80 per cent and 90 per cent by October. The government estimates that it will slow to 65 per cent at the end of this year.
However, President Recep Tayyip Erdogan has insisted on even lower interest rates, saying that they will help to reduce inflation, an argument that contradicts conventional economic theory — and which, so far, hasn’t been validated by real-world experience, least of all in Turkey.
He has called for the benchmark rate to be cut to below 10 per cent by the end of the year, from 12 per cent currently.
“Further rate cuts will inevitably lead to more currency depreciation and higher inflation,” Morgan Stanley economists, including Alina Slyusarchuk, said in a report last week.
Turkish officials reject criticism that rampant price increases are a result of monetary policy errors, instead blaming Russia’s invasion of Ukraine for a global rally in commodities including energy and food.
Yet, even when the impact from such volatile items is excluded, annual Turkish inflation stood at more than 66 per cent as of August, according to a core price index published by state statistics agency TurkStat.
“Price gains are high, broad-based and likely to be persistent. Items with triple-digit inflation accounted for 25 per cent of the consumer basket,” Bloomberg economist Selva Bahar Baziki said.
“Recent and forthcoming interest rate cuts will likely result in even higher inflation in the coming months.”
The experimental policies have already pushed inflation above 100 per cent in parts of the country. Consumer prices in Istanbul, Turkey’s most populous city, more than doubled from a year earlier, according to a retail price index — compiled by the Istanbul Chamber of Commerce — released on Saturday, before the national data on Monday.
A breakdown of the Istanbul data showed the cost of everything from rent to food rose sharply last month. Attempting to ease the pain for poor Turks before elections scheduled for next June, the government has raised the national minimum wage twice in a year.
Mr Kavcioglu has delivered cuts, as sought by Mr Erdogan, at the last two rate-setting meetings, slashing the benchmark by 100 basis points each time.
That has left Turkey with the world’s deepest negative interest rates when adjusted for inflation, while the lira has lost more than 50 per cent of its value against the dollar in the past 12 months.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
