The contribution of expenditure items to economic growth is an interesting finding in the TÜİK (Turkish Statistical Institute) national income reports for the third quarter.
The growth rate appears to be 0.9 percent, but production that is geared toward increasing inventory seems to have contributed an increase of 3.2 points. Without production to increase inventory, we would be seeing a continued recession: A decrease in investment in the same quarter triggered a 3.5 point decrease in the growth rate.
The only reason we are seeing 0.9 pct growth this quarter, which was deemed a “recovery” in the economy, is thanks to production that went into inventory.
In reality, the economic recession is still in effect. Private consumption, which constitutes 57 percent of total national income, contributed a mere 0.9 point increase. Government consumption expenditure, which is 14 percent of total national income, also only contributed a 0.9 point increase to final growth rate.
Household consumption, which constitutes two-thirds of the economy, is at such a slow pace that public consumption, which makes up just one-eighth of the economy, can trigger the same amount of growth by functioning full throttle.
Another interesting finding is the continued decrease in investment and the inability to bring that decline to a halt. While private consumption was able to swing upwards in the third quarter, investment continues to dip.
Both the consumption and investment data in the third quarter show a tendency toward “exhausted growth” in the private sector. I wrote at the end of October that this is the picture of weak, anemic growth.
When you look at the “big picture,” the last five years paint a clear image of an increase in the role of public consumption in a landscape where government spending is going full-force and the private sector is pulling back on consumption.
Credit growth rates were zero in the third annual quarter, so it’s notable that a 0.9 pct growth rate was achieved through an increase in inventory.
If the current fourth quarter delivers a 2.5 percent growth rate, the annual growth rate will even out at zero, and a contraction will be avoided. The government, however, predicts an annual growth rate of 0.5 percent, which would require the last quarter’s growth rate to be 4.5 percent; this seems very unlikely according to the current trend.
Because Ankara was managing the economy by covering up structural weaknesses, they could not predict the emergence of an economic crisis from international political crises. Ankara failed to take precautions from 2013 to now because they underestimated the gradual decrease in global capital flow and high national liquidity, which led to increased loans being taken out.
It wasn’t surprising that a political crisis with the United States in August 2018 triggered the economic crisis. However, residents were terrorized when this political crisis was represented as a “war on our economy” in order to gather votes.
With the addition of poor crisis management, foreign creditors stopped landing and national household consumption plummeted.
Companies in Turkey were faced with the economic crisis with the highest debt ratio in Turkey’s history.
The average rate of loans granted to non-financial firms in relation to gross domestic product was 20 percent from 1989, when capital accounts were liberalized in Turkey, until the 2009 global financial crisis. When the economic crisis started in August 2018, this rate was 80 percent.
In comparison, Turkey was in the lead amongst developing countries when it came to growth in financial leverage.
After a sudden stop in the economic crisis and the following credit crunch, firms not just in Istanbul but also in Anatolian cities are thought to have failed to pay off loans, and some declared concordate.
Meanwhile, Ankara is trying to pump out credit through the public banks and in the last quarter, these efforts have been focused on housing loans. According to real estate data, these loans are flowing to housing that has been previously owned, not newly-built housing that has failed to sell.
What’s interesting is that private and foreign banks do not share the public banks’ enthusiasm on this matter. Maybe it’s not that surprising, as they can see the growth in their loan portfolios and the clients’ inability to pay it back. They differ from public banks, though, because they don’t have ‘public cash’ to which they can charge their losses.
Ankara, having survived so long by letting structural problems fester, is no longer successful at sustaining voter enthusiasm by feeding into political crises at home and abroad.
The business sector is unable to create jobs, as they are suffering to create enough revenue can pay off their debt. Exporters are at a deadlock because of the increased production costs that exchange rates have caused. Nearly a million people are unemployed, or have experienced a decrease in income in last 12 months. Households have pulled back on consumption following a decrease in disposable income triggered by inflation.
The economy is out of energy. With the economy in this weak and feeble state, Ankara cannot carry the country politically to 2023.
For a long time, Ankara had eroded foreign currency reserves worth near 100 billion to hold the rate. Now, it has come to the end of the road. It has spent its last penny and left the rate to the markets. Thus, the “unheard of” invented exchange rate regime has collapsed.
Can the forex loss in Turkey be recovered without sending the bill to the public? If first signs of the establishment of political normalization, democratization and rule of law emerge in a powerful way in Turkey, then the “shrunken” foreign currencies will come back to the system.
If the ruling Justice and Development Party (AKP) sees an increase in erosion of their votes and the increased possibility of losing power in a possible election then it would "use all the ammunition till it is finished" for their own political continuity. But this would indeed mean leaving a “gigantic wreckage” for the citizens of the country.
The trend in that started just before the presidential elections in 2018 and accelerated after the elections changed the chemistry of the economy in Turkey. Private sector in Turkey was restricted in every aspect. From pricing to sourcing, to investment licenses, all regulatory higher bodies worked to make the entrepreneurs feel that ‘the party state’ was watching them at every step.
A currency, that is losing value and is not the good money to its own citizens, cannot be the good money of another country. Most probably those who declared they have switched to the Turkish Lira in Syria will be doing their payments in Turkish Liras and - even if it may be only a few pennies - they will keep dollars to store the value of their accumulation.
No matter how long or short the COVID-19 crisis lasts, a broad range of working masses, but especially the unskilled labor force will be the ones exceedingly affected. They will lose income and their jobs. As a result, inequality will spread on a mass scale and poverty will soar.
Ankara thinks it can obtain stability through the sale of foreign currency from the “back door,” which erodes reserves. Ankara has also resorted to bans and restrictions on foreign currency, but these are actually very old tools from the 70s.
The economy management in Ankara may have this thought of stopping the devaluation of the Turkish Lira by wounding the lira’s convertibility but actually it also damages the debt capacity of the Treasury.
What would we have included if we wanted to write a guideline for those who have the wish to intervene in foreign exchange rates but who do not have the adequate experience, but at the same time want to do it right? Taking into consideration today’s circumstances in Turkey, here is a list.
In those countries where it is presented as they have a “floating exchange rate regime,” if their central banks are intervening at the exchange rate, the name of this in economy literature is “fear of floating.”
Since the COVID-19 crisis erupted, Turkish Central Bank’s reserves fell nearly 20 billion dollars. Now, the thought of “Can there be a swap line opened from the U.S. Central Bank Fedreserve ?” is in question.
Turkey was caught with the coronavirus outbreak at a time when it was weak structurally. Just like in the COVID-19 epidemic, the underlying disease story is the story of those problems in economy which were “swept under the carpet” for a long time. Turkish government's economy policies after 2018 were based on bans, limitations and covering up of the symptoms rather than resorting to necessary steps to solve the problems.
Ali Babacan's unfulfilled desire, the “fiscal rule” theme features in the program of the newly established Democracy and Progress Party’s (DEVA) . Babacan had made preparations to start the practice of fiscal rule in 2010, until Prime Minister Erdoğan shelved this.
Even though its name is “floating exchange rate regime,” the current one in Turkey can only be called “commanded foreign exchange regime.” Some may object to that and suggest “managed floating rate regime.” If it was the latter, then the Central Bank would have openly done it. Everybody would have been informed of a rate regime which has targets, a framework and a system. But we do not know anything about this “dystopian regime.”
Talking about Turkey’s economy is like a stand-up show. Turkey’s Central Bank is as independent as the Fed, says the Finance Minister. This comparison can be uttered because of the mood created in Ankara where the government commands the economy. But even in regimes of command economic, there is interdict and logic.
Politicians may have an inclination to regard the Central Bank as a “cow of the government to be milked.” But it is logic blowing that those who have undertaken CB jobs have rolled up their sleeves and personally worked for that.
In the last two years, the economic policy team governing in Ankara that has been intervening on prices, interest and exchange rates with an iron fist has cost banking executives their jobs for making their own trade decisions in an open market. Turkey is supposedly an open market economy, but Ankara has been nudging market players under the table to the point that the market is “open” only in theory.
The "orchestrated" issue on the agenda last week was an effort to form public opinion about punishing comments on economy by jail sentences and monetary fines. Stories in newspapers were followed by a speech by Economy Minister Berat Albayrak the next day, who wanted to lay "thought infrastructure" for this.
Russia's strategy is quite clever; it continues to accumulate reserves by using dollar and euro for its exports while using ruble for one third of imports. By receiving 7-8 percent of its net foreign trade in ruble, it creates demand for its currency at the same time.More so, Russia is trying to recruit Turkey as a customer for its Russian made SWIFT alternative SPFS and again homemade credit card system MIR.
The three-way wheel of the Turkish economy, which depended on the flow of foreign capital, domestic credit growth, and household consumption, has stopped. It seems like the politicians running the country in Ankara couldn't find the answer to "What awaits the Turkish economy in 2020?"—since they undertook a military operation in Syria to get back the votes they lost due to the economic crisis.