A pedestrian carries her shopping bags along the Istiklal Street near the Taksim Square in Istanbul (file). The AK Party says it will follow through on a pledge to raise the nation’s minimum wage by 30%, potentially stoking above-target inflation and curtailing the central bank’s ability to cushion the economy with lower interest rates.
Bloomberg
Istanbul
Bond investors are coming to terms with a campaign promise that threatens to make them collateral damage of the victory that swept Turkey’s ruling party back into power.
The AK Party says it will follow through on a pledge to raise the nation’s minimum wage by 30%, potentially stoking above-target inflation and curtailing the central bank’s ability to cushion the economy with lower interest rates. The outlook may dent the appeal of Turkish local-currency bonds that have handed investors 11% in dollar terms this quarter, gains that extended some ground since the November 1 election.
“The plan to hike the minimum wage next year would not only increase upside risks on inflation, but also lead to a jump in unit labour costs,” said Erkin Isik, a strategist at Turk Ekonomi Bankasi, who is keeping his call to stay underweight on Turkish bonds. “A further decline in bond yields would require inflation expectations to fall, which seems unlikely for now.”
By boosting the spending power of Turks, the wage outlook would add pressure to inflation expectations that climbed to the steepest level this year in October. It’s also raising questions on whether the AK Party will keep shifting toward a more populist approach at the expense of adopting policies to improve competitiveness and stimulate growth from levels that are below the 10-year average.
During its campaign, the AK Party promised to raise salaries for the country’s lowest wage earners to 1,300 liras ($452) a month to help lure back votes from opposition parties after an inconclusive election in June. The main opposition group pledged to increase the minimum wage by 50%.
Acting Finance Minister Mehmet Simsek said on November 6 that most of the financial burden involved in boosting the minimum wage will fall on companies, not the government. On Thursday, acting Economy Minister Nihat Zeybekci said the Treasury may share the financing burden. Turkey has yet to appoint its new cabinet.
How the costs are spread is important because if employers are forced to shoulder them, it becomes more likely that they will pass price increases onto consumers. Turkish business asked the government to share part of the 16bn-lira price tag associated with the plan next year, Hurriyet newspaper reported on November 11, citing Ibrahim Caglar, the head of the Istanbul Chamber of Commerce.
“The minimum wage increase is to be expected to push inflation higher so we expect the bonds would trade lower,” said Ogeday Topcular, a money manager who helps oversee $300mn in fixed-income assets at Ram Capital in Geneva, who is looking at the 10.5% area as an entry point to buy two- year notes. “There are a lot of moving parts. Minimum wage is only one.”
Two-year yields were 10.25% versus 9.86% for 10-year securities. Projections for steeper consumer-price increases tend to make investors demand higher yields to buy longer-dated bonds as inflation erodes the value of their holdings.
The lira fell 0.1% to 2.8668 per dollar at 5.33pm in Istanbul, trimming its gains this week to 1.8, the most among 24 emerging markets tracked by Bloomberg.
Turkey’s expected inflation rate for the next 12 months rose to 7.34% at the end of October from as low as 6.7% in February, according to a monthly survey of businessmen and economists conducted by the central bank. The monetary authority’s target is 5%.
Not everyone is concerned Turkey’s inflation will immediately accelerate. Tatha Ghose, a senior emerging-markets economist at Commerzbank in London, projects the rate will drop in the first half before rising toward 8% by the end of 2016.
Yields on longer-dated Turkish debt are likely to climb toward 11% as the Fed tightens policy, while the rate on shorter-dated notes will fall, according to Commerzbank, potentially bringing an end to the current inverted yield curve.
Ozlem Derici, economist at Deniz Yatirim in Istanbul, plans to revise upward her 7.4% 2016 inflation forecast because the implications of the new salary floor “could be exponential since workers above minimum wage could also demand higher wages and producers may need to increase the price of their products.”
