Carraighill first published on Turkey in November 2019. This was our first report on an emerging market country, building on our successful research of European countries over several years. We followed by releasing ‘Dissecting Turkey’ in May 2020, the first in a series of quarterly reports to assess key investment issues. Dissecting Turkey 3 was published in November and it included a special report on hyperinflation which looked at Argentina as a case study.
Argentina has seen two crisis periods in its recent history:
Both involved periods of high inflation, currency depreciation and ultimately, default. What follows is a timeline of both crisis periods.
Timeline (2002 crisis):
- 1991 – Argentina pegged the peso to the US dollar. Inflation remained stable for most of the 1990s, growth was strong attracting foreign capital inflow.
- 1999 – Argentina entered recession. The budget deficit rose to 3.7% of GDP and government debt reached 39% of GDP.
- 2000 – An IMF agreement was reached in December, including $14bn in loans.
- 2001 – The government deficit surged to 5.4% of GDP and government debt reached 48% of GDP. Economic output contracted 5%. The government announced a partial debt restructuring plan and further IMF assistance was granted.
- 2002 – Argentina defaulted and allowed the peso to float. It surged to 3.36 against the dollar and inflation rose to 41%. The economy contracted 11%.
Timeline (Today’s Crisis)
- 2003-2008 – Argentina ran a balanced budget, external debt fell, the exchange rate and inflation were stable, and the current account was in surplus. This took place despite the Kirchners being in office (Néstor 2003-2007 and his wife Cristina Fernández 2007-2015).
- 2009 – The government ran a deficit of 1.8%
- 2010 – The current account turned negative.
- 2011-2014 – The government deficit widened to 4.3%.
- 2015 – President Mauricio Macri was elected and took office in December.
- 2016 – President Macri began a program of reform including a cut in export taxes, lifting currency controls and resolving a longstanding dispute with creditors from the 2002 crisis. The central bank raised interest rates to 25%. This led to real GDP growth falling 2%. Despite these changes, the government deficit widened further to 6%.
- 2017 – The US raised interest rates, causing investors to sell Argentine bonds. The worst drought in 50 years also hurt commodity yields. The current account balance deteriorated to 4.8% of GDP.
- 2018 – The peso lost half its value. Since most external and government debt is US dollar denominated, both rose sharply, to 57% and 86% of GDP, respectively. Argentina sought IMF assistance and a $50bn standby loan was granted. The central bank raised interest rates to 60%.
- 2019 – Inflation rose to a record 54% and the peso depreciated a further 59% against the dollar. Capital flight accelerated. Marci lost re-election to Alberto Fernández. Upon taking office, he entered new negotiations with creditors. Fernández stopped attempting to close the deficit. At his first budget he cut taxes, increased public sector wages, increased severance pay and froze utility prices.
- 2020 – The government defaulted on its debts in May by missing $500m of interest repayments on USD bonds. This was the ninth default in Argentina’s history.
The 2002 crisis should have led Argentina to prevent a future crisis from happening. While lessons were initially learned, the last decade has seen a return to profligate spending and budget deficits which erode international confidence.
After losing control of inflation in 2002, Argentina took back control between 2004 and 2014. The period since 2014 has seen Argentina lose control once again. Argentina has a history of manipulating its official inflation statistics although it has improved reporting in recent years. The true inflation rate may be much higher.
What does this mean for Turkey?
The reliability of inflation data in Turkey is questionable, primarily due to media/ academic commentary on the topic which is influenced in part by the lack of an independent central bank. To provide us with an alternative benchmark, we have studied the writings of Steve H. Hanke and his work on Relative Purchasing Power Parity (PPP) in regions experiencing high/ hyperinflation. He shows that in low inflation regions, the price level adjusts, and currency depreciation does not play a major part. However, as inflation accelerates the exchange rate becomes an increasingly important and accurate release valve. The theory states:
- The most important price in an economy is the exchange rate between the local currency and a reserve currency (US$).
- Relative PPP compares the percentage change in the exchange rate to inflation differentials. It is better that absolute PPP as it adjusts for factors including transaction costs and trade barriers.
Therefore, if we know the USD/TRY exchange rate and the level of US inflation in any given period, we can estimate the price level in Turkey. What are our findings? The data suggests the average inflation rate since 2016 is close to 30%. This is double official statistics. Note: We have smoothed monthly fluctuations by including a 6 and 12-month moving average.
Investment implications are available to Carraighill subscribers: If you would like to access the reports mentioned in this article, Carraighill Research Access enables you to access these and other thematic and sectoral research reports through our secure online portal. If you would like to speak to a partner or analyst on the topics raised in this piece, you can contact us here.