The COVID-19 pandemic that started in China and started to affect Turkey at the beginning of March has also created a strong wave in the economy. Turkey was caught by this wave amid ongoing problems of the last two years, the ones it had “swept under the carpet.” 

It will not be possible to reinstate the domestic and foreign demand that has been lost due to the pandemic crisis in the services sector, mainly in tourism. As well as the losses in export orders. 

Ankara, on the other hand, was suffering from the “erosion of votes syndrome” when the pandemic struck. Even before the COVID-19 crisis, in order to recover from the 2019 local elections fiasco, an adventurous economy policy was faithfully adopted. 

Also, with the pandemic, a new cover was found for this adventurous economy policy. 

However, these “extraordinary” oppressive, concealing political steps that damage open economy, that have been ever increasing their dose for the past two years, together with other steps taken after the pandemic, these thoughts involuntarily arise in one’s mind: These steps taken as if there is no tomorrow will all leave a huge wreck for all of us. 

Reserve eroding policies 

First one of these is the erosion of the Central Bank’s reserves with an unseen madness that is not based on any known policy. The target is obviously curbing forex rate pressure that stems from lowered interest rates, which were imposed by heavy pressures on the Central Bank and the banking system. This is done at the expense of eroding the reserves.  

So much so that, as I pointed out in one of my previous articles, except for the gold reserves of the Central Bank which are worth approximately 40 billion dollars, while the foreign currency reserves seen on the balance sheet as of end of May was 54 billion dollars, the debt that was caused by swap transactions done for “window dressing” purposes – so that the foreign currency sold to curb the forex rate pressure is not seen -was 51.8 billion dollars. In other words, foreign currency reserves have eroded.   

If it was only that, then we could have said ok, but, as well as selling the foreign currency that was given to them from the “back door” of the Central Bank, they had also started creating open positions in their own balance sheets. Public banks which have been almost refraining from forex rate risks for the past 10 years, which have had a deficiency or surplus of no more than 1 billion dollars, are now seen to develop open positions with an accelerated pace since the beginning of the year. Open position means reducing foreign exchange assets that are provisions for foreign exchange liabilities. The sum of the open foreign exchange positions of public banks went up to 9.7 billion dollars on the week of July 10. 

If we take into consideration that the open position of the Central Bank including its reserves and its gold reserves has roughly reached 35 billion dollars, then those who are administrating economy policy in Ankara have created, through public banks and the Central Bank, an open position of 45 billion dollars. An increase of 10 percent in forex rates will create a public loss of – with the current rate – 30 billion Turkish Liras; a high price which causes concern. 

If we keep in mind that only in the remaining six months of the year, we will be deprived of a 20-billion-dollar revenue from tourism, it is quite outrageous to both spend this foreign currency reserve and also create a giant forex rate loss that the society will pay with its taxes. 

These policy steps, which can be considered as they were taken as if there was no tomorrow, only by looking at the foreign currency reserve policies, make one think that they can only be taken by a political will that has an envision that it will not be in power tomorrow. 

Besides, the Turkish liras that have been pumped to the system with a giant credit growth, in an atmosphere where the foreign currency gap is deepening, leaves the national currency with a potential value loss in the future.  

Credit balloon 

Another aspect is the credit madness fed by all economy policy authorities in Ankara. Only in the epidemic period (March 6 – July 10) the amount of Turkish lira loans in the banking system has increased by nearly 400 billion liras. This means 23 percent increase in these three months and 93 percent with simple annual basis. Public banks have provided 65 percent of this credit growth. 

Pressure to the banks to loan more has reached such a stage that the economy administration, Central Bank and Banking Regulation and Supervision Agency (BDDK) and all other related institutions have been pressuring banks to expand their loan book more, with various arrangements and side tracks. The Central Bank has a required reserve practice where the credits banks have issued are taken as a base while the BDDK created a practice named “active ratio” where banks are forced to issue credits.   

Right before the pandemic, in January, the Competition Authority had raided the banks and seized certain documents; then, later, it announced that for more than 20 banks, it had launched a preliminary investigation on whether they were violating the law in their deposit, credit, foreign currency and brokerage services. 

In none of the decisions forcing the banks to loan, potential risk factors were not made benchmarks of the practice. “Give the credits, then we will see” mentality was all around. Whereas, the slow down and stagnancy in the economy after the 2018 crisis disrupted the current credit portfolio, changing the risk landscape. This situation was swept under the carpet with “restructuring” of a portion of bad loans. 

While the shock the pandemic caused in the economy triggered more potential damage, a giant credit growth was obviously not the solution. Ankara, with an extraordinary credit growth, was able to hide for a while the current damages, but it has also opened a new door for potential new damages. 

In the past two years, the share of public banks in the credit growth in the banking sector has rapidly increased while private and foreign banks were unwilling in terms of credit growth. When this is taken into consideration, the bad loans of public banks will increase in the case economic stagnation deepens, which in turn will be paid by taxpayers, in other words, by the whole society. There is no surprise that bad loans in public banks which were given in the first place by political orders will be higher than possible bad loans coming from private banks.    

About 10 percent of the increase in bank loans in the past three months are mortgages (37 billion Turkish liras). This, together with low interest rates, has boosted house sales. Ankara’s expectation was that this would accelerate an economic momentum in the construction sector. Whereas, house sales data show that house loans have increased the second hand sales. In the April – June period, first hand sales went down 8 percent compared to the same period last year while second hand sales increased more than 28 percent. 

There is an obvious preference for second hand house sales, which does not help the newly built construction stock, thus it is not expected to create a possible additional demand in the construction sector. 

Ankara is aware that the downslide in the economy since 2018 will gain speed with the pandemic, thus creating vote loss. 

The efforts of the ruling party to slow down this vote erosion (maybe to regain them), its efforts to use the “last bullets” actually correspond to very big damages in the economy in the future. The bill for the future of the economy and the society to pay is increasing. 

If the ruling party sees that 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. 

then it is obvious it is speeding up the process that means “using all the ammunition till it is finished for political continuity,” but which also means leaving a “gigantic wreckage” for the citizens of the country. 

Budget deficit vacuum 

A third factor is the budget deficit. There was an increasing budget deficit issue also before the pandemic. The budget deficit in Turkey which did not exceed 50 billion liras in the past 10 years, with the transition to the “presidential system” in 2018, has reached 154 billion liras in June 2020 – not yet covering the pandemic’s effect fully. 

The low interest expenses in public budget, which President Recep Tayyip Erdoğan frequently boasted about in his political rhetoric in the past, have also diverted from its fixed level of 50 billion liras for the past 10 years and with the “presidential system, they have reached 120 billion liras in June 2020. 

We have not seen anything yet in the budget deficit because there will be bigger deficits in the next term. Both revenue losses and the increased expenditures, both due to the pandemic, will make the deficit reach record highs. Also, we will see an additional burden because of the commitments and guarantees given in the name of the public. These are for infrastructures and city hospitals, indexed to the forex rate, increasing the expenditure burden with their “contingent liabilities.” 

Is there any tomorrow? 

When all of these are reviewed, the situation is that Ankara is quite hopeless about its own political future. The reason is that no government would adopt an economic policy that would trouble it in the future and that would be impossible to manage.   

What we see in Ankara is “If I am going through a vote erosion, then in order to overcome this, even if it would create gigantic problems in the future in the economy, I will not refrain from following these policies.” 

When measured in the scale of “for the good of the party/for the good of the country,” these policies are not good for any end of the scale. A competent policymaker would have noticed that this was not good for any end of the scale, on the contrary it was creating a burden for the future of the country.  

While waiting for politics to normalize in Turkey so that the economy would normalize, much more is waiting for political parties which will create this normalization with a potential consensus; an economic wreckage very difficult to clear.