/ world today news/ The “Turkish economic miracle” was one of the most impressive phenomena in the world economy at the beginning of the century. For more than a decade and a half, the GDP growth rate of a country located on two continents has consistently exceeded 5%. Only India and China can boast such strong performance at this point, but they are starting from a much lower base. GDP per capita in Turkey in the second half of 2010 exceeded the level of some European countries, not to mention the country’s immediate neighbors in Asia.
Economic growth and the subsequent increase in the standard of living of the population and the income of the fast-growing Turkish business became a fixity for the government of the then Prime Minister Recep Tayyip Erdogan. The latter came to power amid the catastrophic crisis of the early 2000s, which cost the country a loss of 10% of GDP, virtually destroyed the lira and sent interest rates soaring by thousands of percent.
Since then, the state has sought to ensure growth at all costs, but recently “something went wrong”.
For a long time, that price was extremely aggressive fiscal and monetary policy. Turkey accepted the persistently high budget deficit and the deeply negative real interest rate of the local central bank (that is, the nominal value of the prime interest rate was almost always below the level of inflation). Given the relatively weak development of the national capital market, the bet was placed on attracting foreign investments, including speculative ones. Up to a certain point, this risk policy works.
The turning point came in 2013 when, amid quantitative easing in the US, investors began to withdraw funds from emerging markets. Turkey, which depends on this money far more than other countries in Eastern Europe or Asia, is among the hardest hit. For some time it is possible to offset the growth of lending and a significant part of the loans are from foreign sources.
The situation becomes even more dangerous if we take into account a feature of the Turkish economy: the republic traditionally has a very low rate of private savings, one of the worst indicators in the world – 2-3 times lower than the indicators in, for example, East Asia or the Middle East east. This indicator is historically weak, and in the second half of 2010 it even dropped to 13%. This means that the country has no internal funds for the development of the economy and it must rely almost exclusively on external financing.
At the same time, the pound began to fall. In 2005, as part of a broad program of financial and economic reforms, a large-scale redenomination took place, when six zeros were simultaneously removed from banknotes. As a result of this step, the Turkish national currency, which previously caused difficulties for tourists due to the number of digits on the banknotes, became almost equal to the dollar. For several years the exchange rate has been fairly stable around 1.3-1.5 pounds to the dollar, but since 2013 it has been falling. Over the next eight years, the currency depreciated more than fivefold, reaching 9.72 pounds to the dollar in October this year.
At the same time, the state has no special levers to influence the collapsing currency. Government reserves are just as modest as private ones. Given the persistent balance of payments deficit – this year it will be in the region of 25-30 billion dollars, and in 2018 it will exceed 50 billion – there is nowhere to get the currency needed to keep the pound in order. Net gold and foreign exchange reserves are below 30 billion dollars (only 4% of GDP, for developing countries the norm starts at 15-20%) and after deducting international and domestic swaps they completely fall into the negative zone.
In 2018-2020, Turkey is wasting most of its reserves trying to save the stifling lira. By the end of last year, it became clear that more than 130 billion dollars had been spent for these purposes with almost zero results. Naji Agbal, then appointed as the new head of the Central Bank (the third in a year and a half), tried to solve the problem with a conservative monetary policy: he immediately raised the interest rate by 6.75 percentage points, tightened the requirements on the banks and tried to limit the credit “banquet”. This had some effect, but angered the country’s political leadership, and Erdogan fired the fiscal conservative in March, appointing a banker more loyal to the official course, Sahap Cavcaoglu.
Let’s note an interesting fact: Turkey has become one of the few countries in the world (along with, for example, China), which in the year of the pandemic managed to demonstrate positive economic growth. It seems even more fantastic given the fact that in 2020 the tourism industry suffered the most, on which the republic depends more than many other industries. The explanation is simple – financial losses are offset by a colossal credit pump.
Objectively, all the prerequisites for an ideal storm in the economy are ripe in Turkey, which is also confirmed by the yield of credit default swaps (insurance against the default of a specific issuer) – they show the probability of insolvency of 7.4% in five years.
Translation: V. Sergeev
#Turkey #teetering #edge #financial #collapse
