Turkish economy at low tide

After the November 6 dismissals from the economy management, prominent politicians Lütfi Elvan and Naci Ağbal took over, both known for their technical skills. Elvan and Ağbal’s efforts to “keep the ball in play” is understandable, within the restricted area drawn for them. However, recent developments suggest that this is also coming to an end.

Turkey’s economy has come to a junction. After 2016, foreign resources have been continuously decreasing. In 2018 we have had the “Brunson crisis” and in 2020, the pandemic, both of which created “sudden stops,” taking us to an ever-unsustainable path.

Both of these crises have demonstrated that they were not only economic crises stemming from “external” causes, but because these crises were badly managed, we have seen the deepening of structural failures. When the “Turkish-style presidential regime” authorized nepotic economy management, the dominant feature of it was not knowledge and experience but empty self-confidence. After a series of mistakes, an economic crisis emerged and it was deepened with bad management.   

After the local elections in 2019, metropolitan municipalities of two major mega cities switched power and were handed over to the opposition, somehow limiting the government’s resources. However, it was inevitable that “domestic resources,” in other words, a policy totally dependent on credit expansion was to fail. This was exactly what happened. Thus, the gigantic credit expansion fed by low interest and negative real interest boosted the demand for foreign currency and gold.

In this period, there was a rapid distancing from not only economic facts and developments, but also democratic values and rule of law, which created a widespread mistrust. Concerns about property rights hit the roof. Demand for foreign currency and gold grew each day. Capital movements reversed and as if that was not enough, with peculiar “back door methods,” foreign currency reserves of the country were totally spent.

At the end of the week when forex rates reached historic highs and when the Turkish Lira was at its lowest, the Governor of the Central Bank and the Minister of Treasury and Finance (the latter was politely “excused” from duty) were dismissed; thus, this page of credit expansion was closed.
Obviously, the growth test drive based on gigantic credit expansion has failed big time. Especially in the 2020 experience, the price has been very expensive.

Warren Buffet’s words, relating to financial markets, “Only when the tide goes out do you discover who’s been swimming naked,” are pretty much describing Turkey’s conditions.

Directions for 2021

The question is what would be the road map after the economic policy of 2020 which cost Turkey dearly. After the November 6 dismissals from the economy management, prominent politicians Lütfi Elvan and Naci Ağbal took over, both known for their technical skills.

Both of them immediately withdrew those wrong decisions of the previous economy management. They stopped the markets from passing the mistrust threshold. The Central Bank increased interest rates twice, stopping the bleeding of the Turkish Lira.

It has been over two months. Elvan and Ağbal are performing well in their own “courts.” They are doing their best within the limits politically drawn for them. So much so that they continue working, even though they would prefer not to, with those bureaucrats who have signed those decisions of the past two years. These are the same bureaucrats who made those decisions forcing banks to issue credits, who eroded foreign currency reserves, who supplied money to the markets even below the policy interest rate. Then, they are now signing texts explaining why the monetary tightening decisions were made and how the stability of the Turkish Lira was maintained. Those who were present when the Turkish Lira was destroyed are still there posing for the picture, damaging the reputation of the bank.

Elvan and Ağbal’s efforts to “keep the ball in play” is understandable, within the restricted area drawn for them. However, recent developments suggest that this is also coming to an end.

The business world, which was not able to raise its voice while mistakes were made, (also, those who raised their voices got into trouble) is now complaining about high interest rates. However, the issue is not only the interest rates.

TOBB President Rifat Hisarcıklıoğlu said that banks were causing trouble while reducing interest rates but when interest rates were raised, they were quite quick in responding. Hisarcıklıoğlu is obviously pointing out to a deep crisis in the corporate sector.

Developed countries provided cash to their citizens who lost their jobs during the pandemic as well as providing financial support and loans for managements for their rent and other expenditures. Whereas, in Turkey, cash support that was not even adequate for daily needs was provided for those who lost their jobs, while loans were encouraged for individuals and companies.

While developed countries took measures to keep the demand high, they also offered assistance to businesses. Turkey, on the other hand, did not perform well in the demand aspect. As a matter of fact, companies should be able to sell their products so that they can pay their debts. What did Turkey do? With cheap loans, it revived the housing and automobile sector. In the 2020 pandemic year, 404,000 cars worth 6.8 billion dollars were imported. Some $25 billion worth of gold was imported.

Reviewing this picture, the discourse of the rulers of this country that “foreign forces” want to destroy us seems so absurd. We have been supporting their automotive companies, gold mines and refineries with our loan campaigns…
Is there a new wave of loan expansion?
We have seen that the past year’s credit expansion has resulted in a gigantic foreign currency reserve loss and balance of sheet damage with high inflation. Now, loan rates are back to 20 percent band. There is a possibility that rates may go even higher with the pressure and acceleration of inflation.

Companies are entering a stagnant economic growth period with debts in foreign currencies. What Hisarcıklıoğlu was voicing was actually the problem in paying debts.

The tide has gone out (foreign currency flow has stopped) and it is discovered that we do not wear a swimsuit (high debt rate). 
Managing the debt with new loans is nothing more than gaining only a little bit of time.

When the flow of capital to Turkey was a flood, politicians distanced from rule of law and democratic values. When it was argued, at that time, that, “economy was not affected.” Now is the time a junction has appeared and we have to select a path.

On the downside, the country's citizens have moved away from their own money to buy gold and foreign currency. Companies are in foreign currency deficit and revenue loss. They are trying to rollover debt. Foreign investors are not bringing in capital; they are exiting. Except for real estate, net direct investments are none.

While companies have been dragged into this problem, the pandemic wave hit the already declining employment market. Some 10.4 million of the 31.5 million people workforce are unemployed. They have given up looking for a job or they are not looking for a job but are ready to start immediately. Also included are those who are allocated short work allowance and who have been sent on unpaid leave. In addition, about half of the so-called “unregistered workers” that total 8.5 million are non-agriculture workers. We do not know how this segment is making ends meet under pandemic conditions and lockdown conditions. There is no aid program for this segment.

Income distribution further deteriorating

Finally, income distribution will be adversely affected under pandemic conditions. In their unpublished article, economists Öner Günçavdı, Aylin Bayar and Haluk Levent, “Evaluating the Impacts of the COVID-19 Pandemic on Unemployment, Income Distribution & Poverty in Turkey” calculate the Gini coefficient as 0.43 for 2020. This means that income distribution in Turkey deteriorated after 2017, returning to its 2003 level in 2020.

As with several other data, the level of income distribution is back to the same level as in the first years of this government. Apparently, all the gains have been lost. While the trouble in the private sector is growing, losses in employment is also growing, as well as unemployment. Income distribution is further deteriorating. Society is rapidly becoming poorer.
Turkey has reached a threshold in both economy and politics. The government has used up all its ammunition, the wreckage has grown bigger. It no longer has a playing field where it can do the same things and get different results. It looks as if it is very difficult for the government to obtain international support while it is in a constant conflict with its commercial and financial stakeholders. 

Will politics in Turkey normalize? Otherwise, it is up to the society to make a decision through democratic channels.

September 10, 2021 Central Bank's Beştepe problem