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Emerging Markets

Scale of Turkey’s economic crisis triggered Erdogan family implosion



When Berat Albayrak, Turkey’s powerful finance and economy chief, posted an emotional resignation message on Instagram on Sunday, he said he hoped to now be able to spend more time with “my father, my mother, my wife and my children”.

There was only a cursory mention of the man who made him the second most powerful figure in government and to whom he owed his political career: his father-in-law, President Recep Tayyip Erdogan.

Turkey is reeling from a week of high political and family drama that began with Mr Albayrak’s departure — but which was foreshadowed by months of mounting economic problems and a currency in freefall.

Yet few will mourn a man who was widely resented and made enemies across the Turkish state. “Most people are just relieved to see him go,” one government official said.

Mr Albayrak, 42, was not only responsible for running the world’s 19th largest economy. The former business executive, who is married to Mr Erdogan’s daughter Esra, had accrued vast influence across government and beyond. Many within the ruling Justice and Development party (AKP) believed he was being groomed by Mr Erdogan as his political heir.

Berat Albayrak with Recep Tayyip Erdogan at a rally in 2017 © Lefteris Pitarakis/AP

His future in politics now appears to be at a dead end.

“I don’t think anyone could ever have imagined what happened,” said one stunned former colleague. “He can never regain the power he used to have.”

The spark for the political and familial implosion appears to have been a sudden realisation for the Turkish president about the true state of the country’s economy.

In recent weeks, Mr Erdogan had faced mounting pressure from within the AKP, which has been suffering in the polls as the fallout from the coronavirus pandemic, rising living costs, high unemployment and a downward spiral in the value of the Turkish lira have taken their toll.

Mr Albayrak had insisted for months that Turkey was outperforming rival economies and was in the midst of a grand economic transformation. He repeated those lines when he met ruling party MPs last week, according to Turkish media reports. 

He also maintained that the currency, which had lost about a third of its value against the US dollar since the start of the year, was not the only criterion that should be used to judge the health of the economy.

But the penny dropped for the president, according to people inside the AKP and the government, after he was briefed on the scale of the crisis confronting the country, especially the dire state of the central bank’s foreign currency war chest. 

The Turkish Lira has lost about a third of its value against the US dollar since the start of 2020 © Emrah Gurel/AP

Once borrowed money and other liabilities are stripped out, foreign currency reserves are in deeply negative territory, with some estimates putting them at minus $50bn at end-September. The gaping deficit is thanks largely to a failed currency intervention spearheaded by Mr Albayrak that has cost an estimated $140bn over the past two years.

Some find it impossible to believe that Mr Erdogan, who routinely meets with a raft of business figures, could really have been unaware of how bad things were.

But others insist that, as a result of sidelining internal critics and surrounding himself with ultra loyalists, he was cut off from reality. 

“The president was usually being briefed by his son-in-law,” said a senior AKP official. “He was too busy to get information from other sources.”

“It’s unbelievable yet believable,” said another person with close links to the ruling party.

Early on Saturday, a notice published in Turkey’s official gazette announced that Mr Erdogan had sacked the central bank governor.

The president replaced him with Naci Agbal, a longtime ally and critic of his son-in-law’s policies — and the man who had opened his eyes to the true economic picture — as he moved to reassert his control over the economy.

Mr Albayrak responded furiously. After publishing his resignation notice, which came as a surprise to even his closest aides, he deleted his Twitter and Instagram accounts and disappeared from public view.

A drastic shift in rhetoric has accompanied his departure. Mr Erdogan on Wednesday promised to win back the “confidence and trust” of investors. The finance minister and central bank governor are planning a roadshow with international investors to lure back badly needed foreign capital. The lira has rallied sharply in response.

Sceptics say Turkey faces many deep political and economic problems that will not be solved simply through new appointments and more market-friendly language. Mr Erdogan, who has deeply unconventional views on economics, will continue to be the most powerful man in government.

But if the central bank meets market expectations by announcing a substantial interest rate increase next week, it could help attract the wave of foreign money needed to pull the country back from the brink. 

Analysts say that, while the state of the economy was largely a problem of Mr Erdogan’s own making, the past week has also demonstrated the adaptability and pragmatism of a man who has dominated Turkish politics for almost two decades.

“Erdogan showed his political skill once again,” said Can Selcuki, head of Istanbul Economics Research, a consultancy. “There was a cost to having Berat in that position for over two years, and Erdogan bore that cost. But when he actually realised that the economy was going to take him down, he pivoted in a way that nobody was expecting.”

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Emerging Markets

Tech-heavy Taiwan stock index plunges on Covid outbreak




Taiwan’s stock market, home to some of the world’s biggest tech companies, suffered one of the largest drops in its history as investors were rocked by a worsening Covid-19 outbreak.

The Taiex fell as much as 8.55 per cent on Wednesday, the index’s worst intraday fall since 1969, according to Bloomberg. It finished down 4.1 per cent.

Construction, rubber, automotive and financials — sectors retail investors had been shifting into from technology in recent months — were the worst hit in the sell-off.

The world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing Company, which has a 30 per cent weighting in the index, fell as much as 9.3 before recovering ground to be down 1.9, while Apple supplier Hon Hai Precision Industry, also known as Foxconn, dropped 9.8 per cent before paring losses to be down 4.7 per cent.

While Taiwan’s sell-off was related to domestic Covid-19 problems, it followed recent declines in global markets as investors worried about possible inflationary pressures.

The falls came as Taiwan’s government was expected to partially close down public life to contain a worsening coronavirus outbreak — something the country had managed to avoid for more than a year.

“The reason that triggered the escalated sell-off during the trading session is the new [Covid-19] cases to be reported this afternoon, and probably the raising of the pandemic alert level,” said Patrick Chen, head of Taiwan research at CLSA. “On top of that, the market before today was already at a point where the index was at an inflection point.”

Taiwan’s strict border controls and quarantine system and meticulous contact tracing measures had helped it avoid community spread of Covid-19 until recently.

That success, which allowed Taipei to forego lockdowns, helped boost the local economy, which grew about 3 per cent last year and 8.2 per cent in the first quarter of 2021.

But health authorities announced 16 locally transmitted confirmed cases on Wednesday, for three of which the infection source was unclear — a sign of widening spread in the community. Authorities had confirmed seven untraced cases on Tuesday, and domestic media reported that the government might introduce partial lockdown measures.

President Tsai Ing-wen called on the public to be vigilant but avoid panicking.

Taiwan’s stock market rose almost 80 per cent over the past year, peaking at a historical high late last month. It is now down 8.5 per cent from that mark.

Retail investors have increasingly moved out of technology stocks in recent weeks, reducing the sector’s weight in trading volume from almost 80 per cent at its height to just over 50 per cent.

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China factory gate prices climb on global commodities boom




The price of goods leaving factories in China rose at the fastest pace in more than three years, on the back of a rally in commodities supported by the country’s economic recovery.

The producer price index rose 6.8 per cent in April year-on-year, beating economists’ expectations and surpassing March’s increase of 4.4 per cent.

The rate was driven in part by comparison with a low base last year in the early stages of the pandemic. But it also reflects a global surge in the prices of raw materials that was first stoked by China and now incorporates expectations of recovering global demand.

While PPI prices in China have leapt, economists suggested there was limited spillover into consumer prices and that the central bank was unlikely to react. China’s consumer price index added just 0.9 per cent in April, the National Bureau of Statistics said on Tuesday, although it touched a seven-month high.

“It tells us that demand at this moment is super strong,” said Larry Hu, head of greater China economics at Macquarie, of the PPI data, although he suggested policymakers would see the increase as “transitory” and “look through it”.

“We’re going to see some reflation trends,” he added.

Signs of tightening in China’s credit conditions have drawn scrutiny from global investors eyeing the prospect of higher inflation as the global economy recovers from the pandemic, especially in the US, which releases consumer price data on Wednesday.

China’s PPI index remained mired in negative territory for most of 2020 following the outbreak of coronavirus, but has started to gather momentum this year. Gross domestic product growth in China returned to pre-pandemic levels in the final quarter of 2020.

An industrial frenzy in China has stoked demand for commodities such as oil, copper and iron ore that make up a significant portion of the index and have helped to push it higher. 

Policymakers in China have moved to tighten credit conditions, as well as attempted to rein in the steel sector. Ting Lu, chief China economist at Nomura, said the relevant question now was “whether the rapid rise of raw materials prices will dent real demand, given pre-determined credit growth”.

Retail sales in China have lagged behind the growth rate of industrial production, putting downward pressure on CPI, which has also been weakened by lower pork prices that rose sharply on the back of African swine fever. Core CPI, which strips out food and energy, rose 0.7 per cent in April 

Julian Pritchard-Evans, senior China economist at Capital Economics, said that producer prices were feeding through into the rebound in consumer prices, but also suggested that pressures on the former were “likely to be mostly transient”.

He added that output prices for durable consumer goods were rising at their fastest level on record.

China’s rapid recovery has been driven by its industrial sector, which has churned out record quantities of steel and fed into a construction boom that policymakers are now trying to constrain. On Monday, iron ore prices hit their highest level on record, while copper prices also surged.

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Iron ore hits record high as commodities continue to boom




The price of iron ore hit a record high on Monday in the latest sign of booming commodity markets, which have gone into overdrive in recent weeks as large economies recover from the pandemic.

The steelmaking ingredient, an important source of income for the mining industry, rose 8.5 per cent to a record high of almost $230 a tonne fuelled by strong demand from China where mills have cranked up production.

Other commodities also rose sharply, including copper, which hit a record high of $10,747 a tonne before paring gains. The increases are part of a broad surge in the cost of raw materials that has lasted more than a year and which is fanning talk of another supercycle — a prolonged period where prices remain significantly above their long term trend.

The price of timber has also hit a record high as US sawmills struggle to keep pace with demand in the run-up to peak homebuilding season in the summer.

“Commodity demand signals are firing on all cylinders amid a synchronised recovery across the world’s economic powerhouses,” said Bart Melek, head of commodity strategy at TD Securities.

Strong demand from China, the world’s biggest consumer of commodities, international spending on post-pandemic recovery programmes, supply disruptions and big bets on the green energy transition explain the surge in commodity prices.

Commodities have also been boosted by a weaker US dollar and moves by investors to stock up on assets that can act as a hedge against inflation.

The S&P GSCI spot index, which tracks price movements for 24 raw materials, is up 26 per cent this year.

Strong investor demand pushed commodity assets held by fund managers to a new record of $648bn in April, according to Citigroup. All sectors saw monthly gains with agriculture and precious metals leading the way, the bank said.

Agricultural commodities have had an especially strong run owing to rising Chinese demand and concerns of a drought in Brazil. Dryness in the US, where planting for this year is under way, is also adding to the upward rise in prices. Corn, which is trading at $7.60 a bushel and soyabeans at $16.22, are at levels not seen since 2013.

“From a macro economic environment to strong demand and production concerns, the ingredients are all there for the supercycle,” said Dave Whitcomb of commodity specialist Peak Trading Research.

Rising copper and iron ore prices are a boon for big miners, which are on course to record earnings that will surpass records set during the China-driven commodity boom of the early 2000s.

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JPMorgan reckons Rio Tinto and BHP will be the largest corporate dividend payers in Europe this year, paying out almost $40bn to shareholders. Shares in Rio, the world’s biggest iron ore producer, hit a record high above £67 on Monday.

Brent crude, the international oil benchmark, has crept back up
towards $70 a barrel, which it surpassed in March for the first time in
more than a year, recovering ground lost as the pandemic
slashed demand for crude and roiled markets.

Supply cuts by leading oil producers have helped to bolster the market
as consumption has begun to recover around the world.

While some Wall Street banks have hailed the start of a new supercycle, with some traders talking of a return to $100 a barrel oil, others are less convinced. The International Energy Agency said oil supplies still remain plentiful meaning any talk of a supercycle is premature.

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