Underlying diseases of Turkey’s economy during corona days

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.

Health authorities have this warning about the COVID-19 epidemic around the world and Turkey: Elderly people and those who have underlying diseases face a higher risk. Health Minister Fahrettin Koca frequently states that almost 65 percent of the deaths and nearly 75 percent of those in intensive care units have an “underlying disease” story.

A worldwide health crisis is ongoing but on the other hand the income concerns of business owners and job concerns of those who have been locked down make one ponder on what will happen to the economy. 

Obviously, economies have fallen into a deep shrinkage and recession pit. For the second quarter of 2020, 10 to 20 percent contraction is estimated. This is not wrong because the service sector which constitutes more than 50 percent of economies has shut down to a great extent.

The answer to the question, “well, how will each country be affected?” is very much like the first symptoms of COVID-19; you have to check first whether the patient has fever and cough. Similarly, under current conditions economies have two basic components. First is whether there is an underlying structural problem. The second is whether income from abroad and budget balance are fragile.

Each country entered the COVID-19 crisis by being affected from different windows. Because a deep recession is foreseen in advance, oil prices went down in half. Countries such as the Gulf countries and Russia, the budget incomes of which depend on oil exportation extensively, have been affected sharply.

While Germany which has budget surplus was more at ease, Italy which has been affected by COVID-19 sharply, is also badly affected economically. Countries such as U.S., U.K. and Japan tried to be preemptive with weighed monetary expansion and substantial budget supports.

What about Turkey?

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.

The measures taken against the economic crisis triggered by the “Brunson crisis” on August 2018, instead of structural solutions, mostly involved decreasing the visibility of the issues and “curing of the symptoms;” in other words, swept under the carpet.

In 2019, because of local elections, economy speeded up, later the loss of two major big city municipalities has pushed the government to “easy and practical daily” paths instead of structural solutions. They started with seizing the Central Bank resources.

The recovery in the second half of 2019 and the beginning of 2020 was provided with extraordinary loan pumping of state banks. While all sectors had a non-existent recovery, private banks were observed not to have a similar appetite. This was because of the fact that they knew very well the damage created since 2013 through overindebted companies.    

Another factor is that after 2018, capital flow decreased and exit started. There was also significant increase in the foreign currency accounts of residents due to low Turkish Lira interest rates and loss of confidence.  

This demand of foreign currency coming from residents was met with foreign currency sales of state banks from the back door of the Central Bank. This is an amount of sale exceeding 30 billion dollars. Also, we were witnessing the exit of non-residents by decreasing their portfolio.

The economy management thought they would be able to hold the foreign exchange rate by this method and made Central Bank cut rates rapidly in block percentiles while pro-government newspapers made headlines “Interest rate down, as well as the exchange rate.”

The cricket and the ant

Well what happened to the economy after the first week of March when COVID-19 started becoming a serious issue in Turkey?

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. The crisis as well as the bad management of the crisis and the efforts to sweep problems under the rug made future crises more expensive.

As a matter of fact, a harsh tsunami, not from an economic or financial wave but coming from health took us to that point. Most probably, we will see a harsher shrinkage than the 2008-2009 crisis.  

The steps taken in the economy field were not different than previous ones; they increased uncertainty of the crisis, the government was left behind the society and even local municipalities.

In the services sector with its 16 million workers, workplaces were closed with administrative decisions; workers were directed toward short-term work funds. Instead of removing anxiety, a 5,000-lira consumer loan was pointed out. Then a bill came out banning employers from firing staff but opening the door for unpaid leave. Workers were made to accept the 1,177-lira unemployment pay instead of the higher 1,752 short-term work payment.

For almost 4 million people who were in the industry and services sector as well as unregistered workers were not directly provided with 1,000 liras cash aid by the Family, Labor and Social Services Ministry, but has been told they are going to be aided.

As far as we know, nearly 2 million people applied to receive the short-term work payment; only 700,000 applicants were put on a salary. Some 2 million people were given 1,000 lira cash aid. The aid criteria for the next 2 million people were not determined yet. It has been almost a month and the authorities do not know the criteria yet, I wonder if those left out of the system have any idea what the criteria are? 

We do not know the numbers but beyond the epic speeches of the members of the government, there is no direct and trustworthy pledge given to those who are anxious about their future, jobs and incomes because of closed workplaces and standing economy.

Also, there is no “pillow” that is needed to meet the economic damages of this crisis. Instead of recovering its past year budget, the government relied on the resources of the Central Bank, in fact, doing the same in this crisis also.

It is not wrong that unprecedented steps are needed naturally for a humanitarian crisis that was not seen before. However, when there is an economy management that has already used this before the humanitarian crisis, then one should think twice.

With or without reserve currency

If you attempt to print money because the U.S. is doing so, then your money will sharply depreciate; while prices decrease in the world in the recession, you may lead your country into hyperinflation. 

There is no doubt that the source of the income transfer should be the Unemployment Insurance Fund in the short term. However, I think the method is wrong. Instead of the Central Bank buying the bonds in the fund and giving it to the Treasury in cash, it should have done repo and limited amounts. This should have been under a program where it would be collected at a certain due date.

Developed countries have opened similar windows, moreover the U.K. Central Bank has opened a direct cash account for the government without any bond purchasing. The difference between the two group of countries is that the money of developed countries is reserve currency while developing countries have deficits in their balance of payments accounts in this reserve currency. For this reason, in developing countries the effect of monetary expansion will be different.

It is a known fact that as in the world, in Turkey also, financial markets were under stress during the spread of the COVID-19 epidemic. The Turkish Lira lost value rapidly, interests went up, the stock exchange fell sharply. Central Bank reserves fell roughly 20 billion dollars compared to the end of February. Market experts report that public banks continue to sell foreign currency. Defending foreign exchange rates at these levels pulls down the already eroded reserves.

One of the biggest items in the balance of payments is tourism revenue. In second and third quarters tourism income, roughly 20 billion dollars of loss is possible. Also because of the drop in demand in all countries, our exports will be hit hardly.

Since we will continue to pay debts in the next coming year, a future when we need foreign currency reserves is rapidly rising in the horizon. While printing money abundantly in one hand and still making public banks sell foreign currency, thus wasting the reserves for holding foreign exchange rates that are undefendable is hardly incomprehensible.

Would anybody lend to one that wastes its reserves?

As in every field, the drift in this field also did not last long. Printing money, cutting interest rates as we did the entire past year, opening the door to the depreciation of the national currency, the administrators of the country defended the exchange rate by eroding the reserves. The same rulers who were complaining about the U.S. administration during the Brunson crisis in 2018 telling people “they have opened an economic war against us,” are now calling on the same administration so that after the epidemic, “the Fed would include our Central bank in its dollar swap window.”

Since 2017, starting with the Iranian-Turkish businessman Reza Zarrab case, the Brunson crisis in 2018, the purchase of S-400 systems from Russia in 2019 and the embargo-blockade possibility related to this, to counter all those, Turkey’s foreign currency reserves have rapidly been transferred from the U.S. Nearly 30 tons of gold that were in vaults in Fed cases were repatriated. Also, the 60-billion-dollar U.S. Treasuries stocks were also switched to gold and other money market instruments.

Interestingly, Fed opened swap lines to a very limited number of other country central banks. The Fed also announced repo facilities against U.S. Treasuries. It had not let Turkey use its swap line in 2009. It looks as if it will not do so this time also.

Since our U.S. Treasuries held in the U.S. are nil now, there is no chance of repo either for the moment.

Central Bank reserves that were 107.8 billion dollars at the end of February have now depleted to 86.5 billion dollars, dropping more than 20 billion.

There is an end to printing money, selling foreign currency and depleting reserves. You would either take steps to strengthen your reserves or drift toward capital controls. 

It is difficult to create foreign currency openings without giving political concessions to the U.S. It gives an idea only by looking at the central banks Fed has allocated dollar swap lines. It can be seen that those central banks that follow and independent and consistent monetary policy are given this opportunity.

Another “foreign currency door” is the IMF. Seeing that the epidemic would cause both a humanitarian and an economic crisis in the world, IMF started a 1 trillion-dollar fund starting first by supporting the less developed countries that need to spend more in health. We know that about 100 countries applied for this urgent financial support program of the 160-member IMF.

The answer to the questions of whether Turkey would apply to IMF, Presidential spokesman İbrahim Kalın said, “There is no thing such as making a deal with the IMF in the agenda.”  

Ankara could not respond with a strong program to those people who lost their jobs in the epidemic, who fear to lose their jobs, who are anxious about the future of their income flow. The first thing Ankara thought of was to ask for 10 liras from citizens with a reference to a national tax practice done during the War of Liberation about 100 years ago. In such a crisis, reminding this must have been the last thing to do. 

Lagging behind in crisis management

Ankara made it compulsory to wear masks in mass transportation but had not thought how it would provide them to citizens. When local municipalities started distributing them free, Ankara tried to distribute them through post offices. When this was impossible because of long queues, they turned to applications over the internet. Then they went back to what the local governments did, distributing them free. Even the 48-hour curfew was announced only two hours earlier, causing thousands of people go out for shopping and cost more harm than good.

Ankara was left even behind the reflexes of local municipalities in managing the epidemic crisis. It is making it worse with under political dominance zones and adding to it the bad economic management of past couple of years.

The first development in the aftermath of the epidemic would be an end to “muddle through” in economy and a closure to the “sweeping the issues under the carpet” era.

It does not seem possible to overcome the epidemic with the least damage from its economic consequences without forming a joint approach with all the segments of the society domestically and the international community.  

Unfortunately, we can say again, “We can evade from our responsibilities, but we cannot evade from the consequences of evading.”

January 19, 2021 Turkish economy at low tide