TURKEY’S TROUBLES
There’s a good chance this story will take a long time to resolve, Joe Chidley writes.
Crisis averted or just delayed?
There’s one, and only one, good thing about banging your head against the wall over and over: It feels really great when you stop.
Maybe we can enjoy that feeling now, as worries seem to have eased over Turkey and its faltering currency, which as of Monday had marked a 30-per-centplus weekly plummet against the U.S. dollar. During that time, fears of contagion roiled global markets. Turkey’s economy represents less than 1.5 per cent of global GDP, but some European lenders are heavily exposed to the lira, and the crisis raised concerns that other emerging markets were at similar risk.
What should have had anyone watching the debacle banging their heads against the nearest wall was that the Turkish policy response seemed to be to, well, do nothing — except blame a mysterious global financial cabal for a crisis of Turkey’s own making. No interest rate increase from the central bank, and a firm no to capital controls, either.
Meanwhile, as is his wont, U.S. President Donald Trump didn’t do anything to help, and in fact made it worse, by hitting Turkey with tariffs over 1) an American pastor being held in the country on charges of espionage, and; 2) the fact that Turkey’s currency was cheap. “I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar!”, Trump tweeted on Aug. 10.
Leaving aside the wisdom of launching a trade war with a NATO ally over one man, the currency justification was — how to put it politely? — peculiar. The U.S. is the most significant destination for Turkish steel, representing about 13 per cent of total exports ( but less than eight per cent of U.S. steel imports). Worse, Trump’s tariff increase signalled heightened tensions and the potential for escalating economic warfare between the U.S. and Turkey — which did not exactly inspire confidence in the Turkish economy. So what Trump did was undermine confidence in Turkey when it needed it most, and effectively helped to push the lira down even further.
But then Wednesday came along, and the storm clouds seemed to recede. The Turkish central bank tightened some rules around currency exchange. The leader of Qatar pledged a fuzzy US$15-billion investment. The U.S. and Turkey reportedly were talking about improving relations, even as the latter hit back against the former with tariffs of its own. And the lira rebounded on Tuesday and Wednesday by more than 10 per cent against the greenback.
Crisis averted — or has it just been deferred?
Well, this story has been a long time coming, and there’s a good chance it will take a long time to resolve.
Turkey borrowed a heck of a lot of money in the post-recession era. That has fuelled strong consumption and economic growth — GDP rose by more than seven per cent last year. But there were costs. Inflation has soared, hitting 16 per cent in July, and some estimates put it at more than 100 per cent now, owing in part to the currency crisis.
And then there’s debt. Gross external debt as of the end of June totalled US$466.7 billion, or more than half of GDP, and almost 70 per cent of that is owed by the private sector, which had been encouraged to borrow by government loan guarantees. That might be manageable when rates are low, but the U.S. Federal Reserve has been raising rates (in case you hadn’t noticed), making foreign debt more expensive and raising the cost of greenbacks in local currency. Turkey’s reserves are low, and the lira crisis has only made paying back foreign debt harder. If it were all U.S.-dollardenominated, that foreign debt represented about two trillion lira a month ago; today, thanks to depreciation, it’s more like three trillion.
Even before the mid-August meltdown, though, the lira had fallen 22 per cent against the greenback on the year as of late July. But Turkey’s central bank has been slow to raise rates, and latterly it has taken to not raising them at all: it held the benchmark one-week repo rate at 17.75 per cent in July even as economists were expecting a one-percentage-point increase.
As monetary policy goes, that stance might not make much sense to anybody — except, that is, President Recap Erdogan. He has opined that higher interest rates lead to higher inflation, which is just about as bad an opinion, economically speaking, as the notion that having a trade deficit is evidence the rest of the world is playing you for a sucker.
Erdogan, by the way, is armed with fresh new powers after his June election victory, and for the past several months he has been purging government and appointing loyalists. Among those is his son-in-law Berat Albayrak, whom he tapped as finance minister to replace Naci Agbal, one of (if not the) last market-friendly figures in the Turkish cabinet. In the three days following Albayrak’s appointment in early July, the lira fell more than three per cent.
Meanwhile, tensions with the U.S. have increased, as Erdogan has increasingly flirted with Russia and expressed concern over U.S. support for Kurdish forces in Syria. For investors, the weakening ties have undermined the position of the West, and the U.S. in particular, as a safety net for Turkey — a role that Trump seems only too willing to relinquish anyway, and not only where Turkey is concerned.
It might be head-banging time again all too soon.