We are controlling the fire, not extinguishing it
We are going through extraordinary days. We had our “Black Friday” last week and started the new week with “Black Monday.” While we could not figure out how the dollar could rise above TRY 6 on Friday, we were surprised to see it rise above TRY 7 on Monday. We witnessed currency depreciation in two days that would be hard to achieve in two years.
Official announcements to calm down the markets began on Sunday night. In the morning, a number of institutions, from the Central Bank to the Banking Regulation and Supervision Agency, from the Capital Markets Board (CMB) to the prosecution offices, intervened to put out the flames. Everyone now is waiting for answers to questions like: “Have we recovered from the shock? Is the fire under control? Are these measures enough to put out the fire?”
In order to be able provide an appropriate response, we must first analyze the source of the fire and the reasons why it reached this level. For this reason, we should not overlook the following basic findings: • The main reason for the fire exists is that the economy has been reduced to one of the world’s most fragile. Turkey is among the 9 countries that OECD sees as most sensitive to external shocks but among them Turkey has the highest current account deficit and external debt relative to national income. On the other hand, Turkey also has the lowest foreign exchange reserves compared to its national income. In other words, Turkey is one of the countries with the highest foreign debt and lowest foreign exchange reserves. Meanwhile, inflation is the highest after Argentina, which has made a stand-by agreement with the IMF. • It is not a coincidence but inevitable for a country’s economy to suffer while money is shrinking in the world, interest rates are increasing, geopolitical risks and commercial tensions are heating up. We are now paying the penalties of bad economic policies that have been pursued for years.
• The Pastor Brunson problem and the latest tensions with the U.S. have accelerated and even exacerbated the fire. But this is not what started the fire. The main causes for the fire are not external, but internal. Even if the crisis with the U.S. is somehow smoothed over, the rising flames will be subdued but the fire itself will continue to burn domestically. And the flames may rise to the sky again with the slightest breeze; we have plenty of fuel left to burn.
• Measures taken last week, mainly the Central Bank, are basically liquidity measures. Their objective is to prevent a congestion in foreign currency and TRY liquidity. In other words, they will not solve the underlying problem; they are designed to prevent the next stage - a liquidity crisis.
• The signs given President Erdogan understands the issues and is prepared to confront them do not inspire confidence. This lack of confidence is also a reason the fire may flare up again.