A turning point
It is clear now that we are on the verge of a turning point in the economy. The elections this weekend were actually local and will not affect the central administration. But it was a tense atmosphere as a result of mistakes made by both the public and private sectors. More important than the election results is to create an environment, starting from Monday, where delayed decisions due to elections can be taken easily. The signs are not good: the lira depreciating sharply, more than 5 percent last week, is a strong sign that we have little room to maneuver and our alternatives are narrowing.
There is something scaring the markets, which stabilized with the Central Bank’s consistent statements regarding “tight monetary policies” and inflation, something that must have worried foreign banks and investors.
The private sector’s foreign exchange liabilities are high, but the public sector’s foreign debt was low for a long time and therefore was a partial anchor for the private sector’s debt. But there has been a significant rise in the public sector’s foreign debt over the last six months and new borrowing costs have doubled - 8 percent now. In addition, the Central Bank’s foreign exchange reserves were depleted by more than $7 billion in March and fell to the lowest level in many years. Together, these developments may be perceived as negative signals, more so when you consider that despite high interest rates on Turkish lira deposits, Turkish residents’ foreign deposits still exceed lira deposits.
2019 will also be a tough year
The main problem is the fact that the strategic action plan announced with the New Economic Program has been neglected during the local election campaign. This plan was expected first after the June elections, then after the currency shock in August. Meanwhile, the economy contracted in the last quarter of 2018 and GDP growth for the year was only 2.6 percent. This was a confirmation of the predictions made by credit rating agencies, which we are never content with and always find hostile. There are also those who argue that there was in fact an annual contraction in the economy in dollar terms when national income calculations are made with the old method.
On top of that, we should note that it will be difficult for the government to revive the economy this year as the real sector is experiencing financial challenges. Lastly, while the current account deficit is shrinking due to economic stagnation, the budget deficit is getting bigger and bigger, reaching a record high in February. The primary balance, which was in deficit territory a while ago (mainly due to higher interest rates - more than election expenditures), will also be a problem.
Foreign exchange reserves are inadequate
Reports by credit rating agencies are notable regarding this.
S&P foresees that the contraction in domestic demand and investments, together with the global financial conjuncture, will make 2019 a tough year. The reverse in balance of payments will lead to stagflation in Turkey. If exports and tourism can compensate the stagnation in investment that will last for a while due to high foreign debt and high interest rates, economic recovery may start in the last quarter of 2019, says S&P.
Moody’s raised Turkey’s foreign vulnerability risk from “high” to “high+” as low domestic savings, energy imports and import dependency of exports leading to the current account deficit will increase the need for foreign financing in a tough global environment. And foreign debts rose significantly. The rating agency also underlines that the deterioration in relations with the West may affect foreign trade and tourism adversely, at a time when foreign exchange reserves are already inadequate.