The Turkish financing model: a curious case of slow decay
► In the 1990s, Turkey has beenwas journeying through the vicissitudes of high & chronic inflation caused by persistent budget deficits, mainly financed by debt issuance, not by money printing. Actually, the whole episode lasted approximately 15 years, and by 1999 that ‘‘model’,l,’ if it ever was a model, hit the wall.
► That was slow death, and the path was rocky. Turkey was hit by major and minor recessions in 1991, 1994, and 1999, and finally in 2001 the story ended.
► The new story has also been of a die-hard nature. The new story was based on foreign trade (current account) deficit instead of budget deficit, and the name of the game was kind of a gold rush, the rush to borrow in dollars and euros because such funding was abundant and cheap.
► However, the road was again rocky, and led to a slippery slope, but death was once again slow. Look at net reserves for instance. They have been falling over the last decade, to almost negative territory this year including swaps. Nonetheless, the economy looked like it was kind of ‘muddling through’ all the way.
► The narrowing trade deficit is once more of an ‘import contraction’ type, rather than a conscious effort to rebalance the sources of growth, with net exports carrying more weight. No, it is mainly due to lack of effective domestic demand that constrains both imports and growth. Just as it always was back in the 1990s.
► Global trade growth forecasts are down by a full percentage point for 2019, amidst weaker investment prospects and trade policy uncertainties. Furthermore, there is the CAATSA problem looming large on the horizon and sanctions on Iran.
► Global trade is expected to stabilize at as somewhat higher growth rate –3.2% according to the WB- – but only in 2021. It isn’t exactly the right time to re-equilibrate. Taking stock of foreign trade, that is.