What foreigners bring
Foreign residents injected $11 billion into the Turkish economy with stocks and government debt securities in 2017. That’s the highest figure for the last five years in terms of capital inflow, which begs the question: Will 2018 be as lucrative as 2017 in terms of the foreign exchange non-residents brought in?
To be able to keep the economic engine chugging, we will need a certain amount of foreign exchange. Clearly, stocks and government debt securities are not the only form it can take, but this capital greases the wheels. If we have less or run out of this foreign exchange, we would face a problem. Thanks to this “fresh” foreign exchange coming into the market, stock markets can be lively and interest rates on government debt securities don’t increase, on the contrary, rates may even fall because of too much demand.
It would be better if we didn’t rely on the foreign exchange non-residents bring in, but alas, we are where we are. To make it through these economic times, we should find a way to keep those flows flowing. Instead, we do virtually everything we can to “prevent” this foreign exchange from coming to Turkey or receive it “with a higher cost”.
With the State of Emergency still in force and no signs from the government that it will be lifted, the last controversial decree-law will almost certainly raise Turkey’s risk premium. Treasury can borrow with an interest rate of 12 to 13 percent, and we can find capital with these interest rates because we give the same interest over one year whereas the same rates are available over ten years in the Western world. But interest rates will inevitably increase next year. Whether we can find the resilience or can decrease the rates is not clear, but it will be tougher to find capital then. And without money it’s clear what will happen: as we wrote before we may need to revise the dollar exchange rate prediction of 4.25 significantly upwards.