Sticking plaster or a crucial injection of capital that could make the difference between Turkey riding out its currency crisis or plunging headlong into a banking and equity meltdown that would send it to the International Monetary Fund (IMF) for a bailout?

That was the big question late on August 15 after Turkey secured a $15bn investment from Qatar following a meeting between Qatar's Emir Tamim bin Hamad Al Thani and Turkish President Recep Tayyip Erdogan in Ankara. Qatari state media said that the money would be put toward economic projects, investments and deposits, while Turkish officials told news agencies the Qatari money would be “channelled into Turkey’s financial markets and banks”, with the implication that the investment would be enough to head off a banking collapse.

One observer who was not convinced by the significance of the generosity of Qatar was Mohamed A El-Erian, the chief economic adviser at German insurer Allianz. He tweeted that Erdogan’s policies, including the Qatari investment, would merely act like a sticking plaster, leaving the possibility open that an IMF rescue will eventually be the only option.

He said: “This is part of the Turkish government’s strategy to avoid the IMF by finding alternative external support. To be a sustainable stabilizer, funding needs to be larger and reach the central bank.”

Nevertheless, a Turkish lira (TRY) rebound that was already under way before the Qatar news broke in the afternoon picked up after the investment was announced. By 23:30 local time on August 15, the lira had pulled back to 5.8905 against the dollar, a recovery of 7.64% on the day.

The Turkish central bank has been pulling out all the stops—short of the whacking great interest rate hike the markets would like to see but which Erdogan, sticking to his unorthodox economic theory that Turkey’s emerging market economy still requires monetary loosening despite the overheated condition it is in, apparently would not—since US President Donald Trump’s August 10 stepping up of tariffs against Ankara sent the already beleaguered lira into another tailspin, taking it beyond never-before-seen 7-to-the-dollar levels. The lira recovery leaves the currency around a third down against the dollar in the year to date, compared to the depreciation of more than 45% that it showed when hitting its all-time low.

New legs
While banking officials pursued regulatory changes to give the lira new legs, Erdogan and his ministers were busy stepping up their response to the “economic war” they claim the US is pursuing against Turkey. The line is that Turkey’s economic problems are nothing to do with its economic fundamentals, but are instead the result of hostile moves made by the US and other foreign powers on global markets. Having already announced a boycott of US electronic goods the day before, ministers on August 15 declared that they were more than doubling tariffs on some US imports including cars, alcoholic drinks and rice.

The move did nothing to knock the lira out of its newfound stride but there was nervousness on the markets ahead of the unpredictable Trump’s response.

Prior to the Qatar announcement, the TRY had gained ground partly thanks to behind-the-scenes central bank initiatives including a hidden interest rate rise involving a return to an unorthodox interest rate corridor policy. Another boost came from banking watchdog BDDK. It cut the limit for Turkish banks’ forex swap, spot and forward transactions with foreign banks to 25% of a bank’s equity, making it harder for banks to buy and sell foreign exchange derivatives with overseas banks and placing an obstacle in the way of investors placing speculative bets against Turkey’s currency.

The move was perceived as aggressive given that the BDDK had said on August 12 the transactions limit would be tied to 50% of a bank’s equity.

‘Payback time’
The agreed investment from the Qataris might be seen as a case of ‘payback time’ when one recalls the badly needed support Turkey has given the gas-rich monarchy in its still unresolved political feud with fellow Gulf Cooperation Council (GCC) member states led by Saudi Arabia and backed by other nations including Egypt. The row has led to the mounting of a land, sea and air blockade against Qatar, something which Turkey, along with Iran, has helped the peninsular nation overcome with the provision of alternative flight routes and deliveries of essential goods.

In an August 15 interview with the state-run news service Anadolu Agency, Qatar’s Ambassador to Turkey Salem bin Mubarak Al-Shafi said: “The state of Qatar is always proactive in supporting its Turkish brothers.”

Timothy Ash, at BlueBay Asset Management, commented: "That Turkish support for Qatar during the stand-off with Saudi Arabia finally paid off. Let’s see if the Chinese and Russians put some money on the table.”

Must move fast
The rift between Ankara and Washington has led to conjecture on whether Turkey might exit Nato and opt for greater strategic alignment with Russia, China and Iran, or, on the other hand, choose to repair its relations with the European Union and fall into the orbit of a ‘West minus Trump’ alliance. But whatever geopolitical course of action Ankara opts for, when it comes to the fragile economic situation it must move fast. The plunge in the lira is likely to push inflation towards or above 20% and tip the Turkish economy into recession in coming months—providing some much-needed rebalancing, note most analysts—but there are two real difficulties that won’t go away.

Firstly the markets have given up on the idea that the central bank still retains its independence and have no confidence that the true monetary master, Erdogan, will steer a wise course. Secondly, more than one third of Turkey’s stock of external debt—standing at $467bn, or 55% of GDP—falls due within a year from now.

As economic analyst Jens Bastian put it on Twitter: “Don‘t be fooled by short-term stabilisation of #Turkish lira. What is happening is a classic currency-and-debt crisis. Despite measures by the government, the crisis is now self-reinforcing, the loss of external confidence linking with domestic currency fluctuations + higher debt.”

Looking at Turkey’s perennially wide current account deficit, presently at around 6% of GDP, and hence large gross external financing requirement of around $230bn, Ash at BlueBay said in a note: “When set against limited CBRT [central bank] FX reserves of USD98bn (including USD22.8bn in gold), the gross financing to FX reserve ratio is very low at around 40%.

“As long as global markets remained flush with QE-driven liquidity, and the bid for EM assets strong, I think relatively high nominal and real carry made international investors and banks look the other way when it came to considering the deteriorating credit story since 2013 (at least) onwards—and longstanding concerns over the Erdogan administration’s unorthodox policy vents.”

For Turkey, he concluded, “it’s no longer about just covering a USD50bn-plus current account deficit but giving enough confidence to international banks and portfolio investors that their investments in Turkey are safe. The risk is that the USD50bn in portfolio investment in Turkey heads for the exits, and some of the USD180bn in short term debts is not rolled. Failure to instil confidence herein, and the gross financing equation becomes vicious/toxic”.