On Jan. 17, while the day was ending in Istanbul, the offices of deputy general managers of private banks in charge of fund management (treasury) were raided by controllers from the Turkish Competition Authority (RK). In the computers of executives, their e-mails and their correspondence in the Bloomberg system that provides financial information and news were searched by these three words, “fixing, swap and exchange.” News outlets started posting news stories that Turkey’s Competition Authority (RK) has launched a preliminary investigation into more than 20 banks over possible violations of competition rules in the deposit, exchange and intermediary services.
A new weight was being added to the already existing pressure that has long been over the banks and their executives. In their search, the inspectors were using these words like a sword of Damocles with the implication that the banks were cartelizing in their foreign exchange operations.
In an atmosphere where the “Big Brother is watching you” it is illogical to assume that banking staff would form a cartel and do this kind of business through written correspondence and easily accessible records.
At the time when inspectors were raiding the banks, I witnessed several bank executives leaving their WhatsApp groups they were members of in their private phones. The reason is that in this “witch hunt” they could have been made to face all kinds of accusations.
It is not normal that an independent institution acts like the “stick” of the government. Also, this is not a first. At the beginning of 2019, when fruit and vegetable prices hiked because of cost increases due to the sharp rise in exchange rates the RK was again activated and super market chains were forced to make sales that caused them to lose money. It was because they felt the “threat stick” of a possible investigation. In 2019, on February 4, consumer price index was announced; on February 7, the competition authority had decided to open investigation for 23 market chains to determine whether they had been involved in any anti-competition activities. Market chains, with fear, started selling certain vegetables at a very low price. We still do not know what the result of the investigation is.
As a matter of fact, at the same period, in the first six months of 2019, Ankara dictated the banks which pricing cap they cannot exceed in deposit and credit operations. This was the time when banks were forced to act like a cartel by the government but the competition authority was “hibernating.” Because of this situation, several account owners started leaving the Turkish Lira opting for foreign currencies. Well, the same RK, today, is launching an investigation on “what is happening in foreign exchange?”
Well, why is Ankara giving a new message of “threat” now with this raid of the inspectors to the banks?
As a matter of fact, all the bank executives are aware what this is signaling. Because for some time, while public banks have opened their loan channels to full blast, figures showed that private and foreign banks did not have the same appetite. Ankara, on the other hand, had increased its pressure on private banks to turn on their credit taps.
On the second half of 2019, with the contribution of public banks, credit loan volume grew, but private banks still did not have an appetite for loans. This was despite the fact that interest rates had been lowered more than 12 points in the past six months by the Central Bank and despite incentives for those banks that had improved lending.
Private banks know very well what problem they are facing; their lending portfolio has rapidly deteriorated with the economic crisis. The deterioration continues. They are also aware that a certain portion of loans are being “floated” under the name of “restructuring.”
Those public banks that have been “given an assignment,” are covered, one way or another, the equivalent of their duty losses from the central budget. There is no such a “tap” between private banks and their shareholders and investors.
Nowadays, two things are happening. There is pressure to private banks to “open their credit taps wide open,” while the private sector is pressured to “make investments.”
On Monday, Treasury and Finance Minister Berat Albayrak held an evaluation meeting for 2019. He said he heard of the investigation launched by the RK “from the markets;” despite the fact that institutions are no longer independent and no institution can take a step without the consent of Ankara’s Beştepe Palace.
Speaking at this evaluation meeting, Albayrak said at the 2019 balance sheet of certain banks, serious profits were recorded and the year was a good year for private banks. As of 2020, private banks should be a part of this system in a coordinated and synchronized way and they should also change, he said. “I am saying this: Will it be plaza banking or market banking? Are we going to go out to the field or are we going to gaze into the sky at the top of the high-rise buildings? This should be a period when functional banking will be a part of the transformation by going out on the field, going to the real sector and the markets.” He was expressing publicly in a very soft tone what was wanted from private banks.
Another indicator of the “pink lies” Ankara has been drawing about economy is the issue of the independence of the Central Bank.
The peak of this was at the World Economic Forum at Davos. In a panel attended by Albayrak, the moderator who seemed to be aware of what was going on in Turkey asked that there were question marks about the independence of Turkey’s Central Bank. Albayrak responded, “Central Bank is as independent as the Fed.”
When I heard this, I thought this sentence could have only been uttered in a stand-up show. Or maybe, we have moved so much fast forward that we make fun of the international public.
The essence of the matter is this: The government has destroyed institutions and rules in Ankara. The same government removed the governor of the Central Bank. The new governor lowered interest rates more than 12 points. The Central Bank is made to find profit generating ways with forced methods which then is transferred to the budget. Questionable methods are found to prevent the depreciation of the Turkish Lira due to the escape from the lira. The foreign currency reserves of the Central Bank have melted, but they are able to hide this. All of this creates a [false] self-confidence. With this mood, Berat Albayrak is able to say the Turkish Central Bank is as independent as the Fed, the US Central Bank.
Calling this economic regime a “command economy” would be unfair to the regimes that have been structured as command economies. In a command economy, there is an integrity and logic. This regime can only be called “directionless command economy.”
Our economy administration wasted billions of cash foreign currency of the Central Bank and public banks just to maintain a self-styled economy policy and to keep the foreign exchange rate at a certain level. It is a pity that now, this economy management, with its collapsed economy policy, is resorting to the monetary tightening of the Central Bank.
Unlike what those in Ankara who are managing the economy believe, 51 percent of the economy is not psychological perception, it is trust. Empires of fear do not generate trust.
Those who are ruling the country are spending so much energy on blaming vague foreign powers for all the wrong and bad management. If they could have channeled this energy to understanding the problems of the country, then we would have gone a long way and truly would have made these “foreign powers” envious of ourselves.
Turkish Treasury is “printing” forex bonds to create additional foreign currency for its own operations. Public banks, on the other hand, are spending their cash foreign currencies and replacing them with forex bonds the Treasury is printing.
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.”
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.
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. The economy is out of energy. With the economy in this weak and feeble state, Ankara cannot carry the country politically to 2023.
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.