Pimco, one of the world’s biggest asset managers, sees capital controls as a more likely attempted solution to Turkey’s economic predicament than an International Monetary Fund (IMF) programme.

With Turkey poised perilously on the edge of an out and out currency-and-debt crisis, Yacov Arnopolin, EM portfolio manager at Pimco, on August 8 told Bloomberg Television: “I think there are two camps out there, the bulls are saying they will go to the IMF, the bears are saying we will get to capital controls. I think in the near future neither is likely but maybe if there was a gun to my head I would say capital controls are more likely than the IMF simply because President [Recep Tayyip] Erdogan is very resistant to letting in outsiders.”

He added: “[…] I think the reason that the bonds and the currency are performing so poorly is that there are really a lot of questions around their policy mix, there are questions around their reaction function, and this is a country that has been pursuing a high-growth policy while also having a huge current account deficit so there are a lot of vulnerabilities and yet you look at surveys and 65% of the population believes that Turkish lira weakness is actually a conspiracy against Turkey by the West…”

Turkey’s corporates and banks were going to be hurt by the economic woes, he said, adding that “we are pretty concerned about the path, the direction of travel for the country”.

James Athey, senior investment manager at Aberdeen Standard Investments, who appeared on the TV channel alongside Arnopolin, said: “The dynamic that concerns me most here is the self-fulfilling nature of this. The Turkish lira depreciation and what that means for inflation and what that means for the necessary nominal depreciation of the FX rate just to keep the real exchange rate constant…

“When you’ve got 15-20% inflation and the currency today is still weakening by two to three percent every day that is almost a self-fulfilling prophecy and it very much needs intervention really to stem that and instead of following a sort of fairly standard playbook in terms of policy response… they’re not, they’re sort of ripping that up, doing things in a very inconsistent fashion. The central bank still behaves like it is under some influence from politicians and that really does concern emerging market investors.”

Ash: I cannot see capital controls
Timothy Ash, a strategist at BlueBay Asset Management, said in an August 8 note to investors: “Personally I cannot see capital controls in Turkey—but [the Pimco comments] just show where the market is in terms of thinking about Turkey risks. Why no capital controls? Because Erdogan and his business constituency are trader/business people at heart, and they understand what capital controls mean in terms of making doing business that much more difficult.”

Ash said that assuming US-Turkey relations see something of a pick-up, in response to bilateral talks under way towards conciliation over the exchange of tit-for-tat sanctions in the pastor Andrew Brunson affair, “I can see Turkey reaching out to the IMF”.

However, he noted that without an agreement with the US over outstanding issues—such as the detention and prosecution of Brunson, the alleged link of Turkey’s Halkbank to the conviction of one of its deputy CEOs over a money laundering scheme that evaded Iran sanctions and the S400 missile defence systems which the US wants to stop fellow Nato member Turkey acquiring from Russia—“the US would drag its feet over a new IMF deal for Turkey.”

Ash concluded: “Erdogan has been critical of the IMF, and has made a big thing of paying back the IMF early, and of no longer being dependent on the IMF. But needs must. If push came to shove, he would do a u-turn, as he has so many times [with other issues] before.”