Turkish currency and debt crisis, 2018

The Turkish currency and debt crisis of 2018 (Turkish: Türkiye döviz ve borç krizi) is an ongoing financial crisis in Turkey with international repercussions due to financial contagion. It is characterized by the Turkish lira plunging in value, high inflation, rising borrowing costs, and correspondingly rising loan defaults. The crisis was caused by the Turkish economy's excessive current account deficit and foreign-currency debt, in combination with President Recep Tayyip Erdoğan's increasing authoritarianism and his unorthodox ideas about interest rate policy.[1][2]

Current account deficit and foreign-currency debt[]

A longstanding characteristic of Turkey's economy is a low savings rate.[3] Since Recep Tayyip Erdoğan assumed control of the government, Turkey has been running huge and growing current account deficits, $33.1 billion in 2016 and $47.3 billion in 2017,[4] climbing to US$7.1 billion in the month of January 2018 with the rolling 12-month deficit rising to $51.6 billion,[5] one of the largest current account deficits in the world.[3] The economy has relied on capital inflows to fund private-sector excess, with Turkey’s banks and big firms borrowing heavily, often in foreign currencies.[3] Under these conditions, Turkey must find approximately $200 billion a year to fund its wide current account deficit and maturing debt, while being always at risk of inflows drying up; the state has gross foreign currency reserves of just $85 billion.[2]

The economic policy underlying these trends had increasingly been micro-managed by Erdoğan since 2008 and strongly so since 2013, with a focus on the construction industry, state-awarded contracts and stimulus measures, while neglecting education and research and development.[6] The motive for these policies have been described as Erdoğan losing faith in Western-style capitalism since the 2008 financial crisis by the secretary general of the main Turkish business association, TUSIAD.[6]

Investment inflows had already been declining in the period leading up to the crisis, owing to Erdoğan instigating political disagreements with countries that were major sources of such inflows (such as Germany, France, and the Netherlands),[1] amid worries about the rule of law in Turkey after the 2016 coup attempt that prompted the government to seize the assets of those with even tangential ties to the coup,[1] and worries about the lira, the decreased value of which threatens to eat into investors' profit margins.[1] Investment inflows have also declined because Erdoğan's increasing authoritarianism has quelled free and factual reporting by financial analysts in Turkey.[7]

By the end of 2017, the corporate foreign-currency debt in Turkey had more than doubled since 2009, up to $214 billion after netting against their foreign-exchange assets.[8] Turkey's gross external debt, both public and private, stood at $453.2 billion at the end of 2017.[9] As of March 2018, $181.8 billion of external debt, public and private, was due to mature within a year.[10] Non-resident holdings of domestic shares stood at $53.3 billion in early March and at $39.6 billion in mid-May, and non-resident holdings of domestic government bonds stood at $32.0 billion in early March and at $24.7 billion in mid-May.[11]

Presidential interference with the central bank[]

Average Turkish lira equivalent of 1 US Dollar (2005–2017)[12]
Year Exchange rate
2005
1.344
2006
1.428
2007
1.303
2008
1.302
2009
1.550
2010
1.503
2011
1.675
2012
1.796
2013
1.904
2014
2.189
2015
2.720
2016
3.020
2017
3.648
2018
4.5
The Turkish lira has a history of accelerating loss of value relative to the euro, breaching the mark of five lira per euro in early 2018

Money supply in Turkey has grown at an annual rate of 16 percent since 2014, and 18 percent since 2016. This compares to an annual growth in money supply, as calculated under orthodox economic theory by economist Steve Hanke, of no more than 13 percent in order to meet the central bank’s inflation goal of 5 percent.[13] As a consequence of these easy money policies, Turkey has experienced substantially higher inflation than other emerging markets.[14] In 2018, the lira's exchange rate accelerated deterioration, reaching a level of 4.5 USD/TRY by mid-May and of 4.9 USD/TRY a week later. Among economists, the accelerating loss of value was generally attributed to Recep Tayyip Erdoğan preventing the Central Bank of the Republic of Turkey from making the necessary interest rate adjustments.[15][16]

Erdoğan, who claimed interest rates beyond his control to be "the mother and father of all evil",[17] shared unorthodox interest rate theories in a 14 May interview with Bloomberg and said that "the central bank can't take this independence and set aside the signals given by the president."[15][18] Presidential interference with central bank policy comes with a general perception in international investment circles of a "textbook institutional decline" in Turkey, with Erdoğan seen increasingly reliant on politicians whose main qualifications for their jobs is loyalty, at the expense of more qualified and experienced options.[19] Erdoğan also has a long history of voicing Islamist discourse of interest-based banking as "prohibited by Islam" and "a serious dead-end".[20][21]

The Financial Times quoted leading emerging markets financial analyst Timothy Ash analyzing that "Turkey has strong banks, healthy public finances, good demographics, pro-business culture but [has been] spoiled over past four to five years by unorthodox and loose macroeconomic management."[22] By mid-June, analysts in London suggested that with its current government, Turkey would be well advised to seek an International Monetary Fund loan even before the dwindling central bank foreign exchange reserves run out, because it would would strengthen the central bank’s hand against Erdoğan and help gain back investor confidence in the soundness of Turkey's economic policies.[23]

Economist Paul Krugman described the unfolding crisis as "a classic currency-and-debt crisis, of a kind we’ve seen many times", adding: "At such a time, the quality of leadership suddenly matters a great deal. You need officials who understand what’s happening, can devise a response and have enough credibility that markets give them the benefit of the doubt. Some emerging markets have those things, and they are riding out the turmoil fairly well. The Erdoğan regime has none of that."[24]

Consequences in Turkey[]

During the emergence of the crisis, lenders in Turkey were hit by restructuring demands of corporations unable to serve their USD or EUR denominated debt, due to the loss of value of their earnings in Turkish lira. While financial institutions had been the driver of the Istanbul stock exchange for many years, accounting for almost half its value, by mid-April they accounted for less than a third.[25] By late May, lenders were facing a surge in demand from companies seeking to reorganize debt repayments.[26] The asset quality of Turkish banks, as well as their capital adequacy ratio, kept deteriorating throughout the crisis.[27] By June Halk Bankası, the most vulnerable of the large lenders, had lost 63 percent of its US dollar value since last summer and traded at 40 percent of book value.[28]

Banks continuously raised interest rates for business and consumer loans and mortgage loan rates, towards 20 percent annually, thus curbing demand from businesses and consumers. With a corresponding growth in deposits, the gap between total deposits and total loans, which had been one of the highest in emerging markets, began to narrow.[29][30] However, this development has also led to unfinished or unoccupied housing and commercial real estate littering the outskirts of Turkey’s major cities, as Erdoğan's policies had fueled the construction sector, where many of his business allies are very active, to lead past economic growth.[31][30] In March 2018, home sales fell 14 percent and mortgage sales declined 35 percent compared to a year earlier. As of May, Turkey had around two million unsold houses, a backlog three times the size of the average annual number of new housing sales.[32]

As a consequence of the earlier monetary policy of easy money, any newfound fragile short-term macroeconomic stability is based on higher interest rates, thus creating a recessionary effect for the Turkish economy.[33] In mid-June, the Washington Post carried the quote from a senior financial figure in Istanbul that "years of irresponsible policies have overheated the Turkish economy. High inflation rates and current account deficits are going to prove sticky. I think we are at the end of our rope."[34]

Recep Tayyip Erdoğan's unorthodox views on interest rates are considered one of the most important causes of the crisis.[15][1]

Timeline of events[]

International consequences[]

The crisis has brought considerable risks of financial contagion. According to the Bank for International Settlements, international banks had outstanding loans of $224 billion to Turkish borrowers, including $83 billion from banks in Spain, $35 billion from banks in France, $18 billion from banks in Italy, $17 billion each from banks in the United States and in the United Kingdom, and $13 billion from banks in Germany.[63][64] On 31 May 2018, the Institute of Financial Research (IIF) reported that the Turkish crisis has already spread to Lebanon, Colombia and South Africa.[65]

Mehmet Şimşek is cred with having tried but failed to bring back orthodoxy to Turkish interest rate policy.[37]

Timeline of events[]

Conspiracy theories[]

In the campaign for the 2018 general election in Turkey, a widespread conspiracy theory, infused with antisemitism, claimed that the Turkish lira's decline was the work of a shadowy group, made up of Americans, English, Dutch and "some Jewish families" who would want to deprive incumbent President Erdoğan of support in the elections.[79] According to a poll from April 2018, 42 percent of Turks, and 59 percent of Erdoğan’s governing Justice and Development Party (AKP) voters, saw the decline in the lira as a plot by foreign powers.[80]

Members of the government have promoted this attitude with an unrelenting stream of conspiracy theories blaming foreign outside powers for Turkey’s economic misfortunes.[1] During the major lira sell-off on 23 May, Turkey’s energy minister, Erdoğan’s son-in-law Berat Albayrak, told the media that the recent sharp drop in the value of the lira was the result of the machinations of Turkey’s enemies.[81] On 30 May, foreign minister Mevlüt Çavuşoğlu claimed that the plunge of the lira would have been caused by an organized campaign masterminded abroad, adding that the conspiracy would include both "the interest rate lobby" and "some Muslim countries", which he however refused to name.[82] At an election campaign rally in Istanbul on 11 June, Erdoğan claimed that the recently published 7.4 percent GDP growth figure for the January to March period would demonstrate victory against what he called "conspirators" whom he blamed for May’s heavy falls of the Turkish lira.[83]

Politics and corruption[]

Muharrem İnce (pictured) and Meral Akşener vowed to restore integrity to economic institutions in Turkey.
Meral Akşener, İYİ Party leader and presidential candidate, announcing her economic policies on 7 May.

Crisis as a topic in elections[]

On 16 May, a day after Justice and Development Party (AKP) president Recep Tayyip Erdoğan had unsettled markets during his visit to London by suggesting he would curb the independence of the Central Bank of Turkey after the election, Republican People's Party (CHP) presidential candidate Muharrem İnce and İYİ Party presidential candidate Meral Akşener both vowed to ensure the independence of the central bank if elected.[84][85][86]

In a 26 May interview on his campaign trail, CHP presidential candidate Muharrem İnce said on economic policy that "the central bank can only halt the lira’s slide temporarily by raising interest rates, because it’s not the case that depreciation fundamentally stems from interest rates being too high or too low. So, the central bank will intervene, but the things that really need to be done are in the political and legal areas. Turkey needs to immediately be extricated from a political situation that breeds economic uncertainty, and its economy must be handled by independent and autonomous institutions. My economic team is ready, and we have been working together for a long time."[87]

In a nationwide survey conducted between 13 and 20 May, 45 percent saw the economy (including the steadily-dropping lira and unemployment) as the greatest challenge facing Turkey, with foreign policy at 18 percent, the justice system at 7 percent and terror and security at 5 percent.[88]

İYİ Party presidential candidate Meral Akşener, supported by a strong economic team led by former Central Bank Governor Durmuş Yılmaz,[31] had on 7 May presented her party's economic program, saying that "we will purchase the debts from consumer loans, cr card and overdraft accounts of 4.5 million citizens whose debts are under legal supervision of banks or consumer financing companies and whose debts have been sold to collection companies as of April 30, 2018. It is our duty to help our citizens with this condition, as the state has helped big companies in difficult situations."[89]

On 13 June, CHP leader Kemal Kılıçdaroğlu reiterated the opposition's view that the state of emergency in place since July 2016 were an impediment to Turkey's currency, investment and economy, vowing that it be lifted within 48 hours in case of an opposition victory in the elections.[90] İYİ Party leader and presidential candidate Akşener had made the same vow on 18 May,[91] while CHP presidential candidate İnce had said on 30 May that emergency rule must be lifted if Turkey is to attract foreign investors: "Foreign countries do not trust Turkey, thus they do not invest in our country. When Turkey becomes a country of the rule law, foreign investors will invest thus the lira will gain value."[92] Early June, President Recep Tayyip Erdoğan had suggested in an interview that the issue of lifting the emergency rule would be discussed the elections, however asked back: "What's wrong with the state of emergency?"[90]

Allegations of forex insider trading[]

On 25 May, Republican People's Party (CHP) deputy chair Aykut Erdoğdu called the Financial Crimes Investigation Board of Turkey (MASAK) to investigate exchange rate transactions made amid rapid decline and partial recovery in the value of the lira on 23 May, alleging insider trading by market participants who knew of the 300 basis points interest rate hike by the Turkish central bank in advance.[93]

Two weeks earlier, Peoples' Democratic Party (HDP) presidential candidate Selahattin Demirtaş, writing in a letter from prison—where he has been held without conviction since 2016, accused of inciting violence with words—[94] slammed the ruling government of Recep Tayyip Erdoğan as corrupt, saying that "the biggest problem for the youth in Turkey is corruption which has accompanied with AKP governance."[95]

See also[]

References[]

  1. ^ a b c d e f g Borzou Daragahi (25 May 2018). "Erdogan Is Failing Economics 101". Foreign Policy. 
  2. ^ a b "Inflation rise poses challenge to Erdogan as election looms". Financial Times. 5 June 2018. 
  3. ^ a b c "How Turkey fell from investment darling to junk-rated emerging market". The Economist. 19 May 2018. 
  4. ^ "Turkey's current account deficit at $5.4 billion in April". Hurriyet Daily News. 11 June 2018. 
  5. ^ "Turkish current account deficit more than doubles". Ahval. 12 March 2018. 
  6. ^ a b Marc Champion; Cagan Koc (22 June 2018). "A Crazy $200 Billion Says Erdogan Wins His Election Bet". Bloomberg. 
  7. ^ "A Big Chill Has Silenced Turkey's Market Analysts". Bloomberg. 24 May 2018. 
  8. ^ "Turkey's Bill for Debt-Fueled Economic Growth Starts to Fall Due". Bloomberg. 29 March 2018. 
  9. ^ "Turkey's external debt stock reaches $453.2B". Anadolu. 30 March 2018. 
  10. ^ "Short Term External Debt Statistics" (PDF). Türkiye Cumhuriyet Merkez Bankası (Central Bank of the Republic of Turkey). March 2018. 
  11. ^ "Securities Statistics" (PDF). Türkiye Cumhuriyet Merkez Bankası (Central Bank of the Republic of Turkey). 18 May 2018. 
  12. ^ "Exchange rates". OECD. 
  13. ^ "Turkish inflation is 40 percent, top U.S. economist says". Ahval. 29 May 2018. 
  14. ^ "With high inflation, Turkish lira lacks yield buffer". Reuters. 11 October 2017. 
  15. ^ a b c "Turkey's leader is helping to crash its currency". Washington Post. 16 May 2018. 
  16. ^ "Investors lose their appetite for Turkey". Financial Times. 16 May 2018. 
  17. ^ Küçükgöçmen, Ali; Taner, Behiye Selin (2018-05-11). "Turkey's Erdogan calls interest rates "mother of all evil"; lira slides". Reuters. Archived from the original on 2018-05-19. Retrieved 2018-06-09. 
  18. ^ a b Marc Edward Hoffman (25 May 2018). "The unorthodox theory behind Erdogan's monetary policy". Al-Monitor. 
  19. ^ "Why Investors Have Become Skittish About Turkey". Bloomberg. 18 May 2018. 
  20. ^ "Turkish lira falls further as Erdogan calls for interest rate cuts". Financial Times. 24 November 2016. 
  21. ^ "Rise of Turkish Islamic banks chimes with Erdogan's ideals". Reuters. 15 March 2015. 
  22. ^ a b "Turkish lira slides almost 6% in worst week in a decade". Financial Times. 15 June 2018. 
  23. ^ Mark Bentley (16 June 2018). "Turkey needs IMF loans after investor confidence undercut". Ahval. 
  24. ^ Paul Krugman (24 May 2018). "Turmoil for Turkey's Trump". New York Times. 
  25. ^ "Investors Bet Against Turkey Banks as Debt Wave Gains Force". Bloomberg. 10 April 2018. 
  26. ^ a b "Turkish Banks Face Rising Pile of Debt-Restructuring Demands". Bloomberg. 31 May 2018. 
  27. ^ Mark Bentley (9 June 2018). "'Unethical' Moody's forewarns second wave of Turkish crisis". Ahval. 
  28. ^ David P. Goldman (12 June 2018). "Turkey's economic crisis has just begun". Asia Times. 
  29. ^ "Cash-hungry Turkish banks raise rates to highest since crisis". Ahval. 9 April 2018. 
  30. ^ a b "Turkey limits real estate commissions, house prices slashed". Ahval. 14 May 2018. 
  31. ^ a b Mark Bentley (19 April 2018). "Turkish real estate ills reflect Erdoğan's snap poll decision". Ahval. 
  32. ^ "Turkish property firms to slash prices in one-month drive to revive market". Reuters. 15 May 2018. 
  33. ^ Güldem Atabay Şanlı (8 June 2018). "Turkish contraction looms as rates fallout becomes evident". Ahval. 
  34. ^ Ishaan Tharoor (19 June 2018). "The quest to defeat Erdogan". Washington Post. 
  35. ^ "Yildiz $7 Billion Restructuring Bid Adds to Turkish Bank Woes". Bloomberg. 12 February 2018. 
  36. ^ "IMF backed by terrorists has failed in Turkey – adviser". Ahval. 21 February 2018. 
  37. ^ a b "Rumors of Turkish deputy PM's departure spook markets". Al-Monitor. 5 April 2018. 
  38. ^ "Turkey's Dogus in talks with banks on debt restructuring". Reuters. 7 April 2018. 
  39. ^ "'Disbelief': Investors in Turkey stunned by Erdogan's fight with markets". Reuters. 15 May 2018. 
  40. ^ "Istanbul foreign exchange bureaus close to survive turbulence". Ahval. 23 May 2018. 
  41. ^ "Turkey's sectoral confidence goes down in May". Hurriyet Daily News. 25 May 2018. 
  42. ^ "Turkey Raises Interest Rates to Halt Slide Into Currency Crisis". Bloomberg. 23 May 2018. 
  43. ^ Matt O'Brien (25 May 2018). "Turkey tried to save its currency. It worked — for a day". Washington Post. 
  44. ^ "Erdoğan threatens finance sector over faltering lira". Ahval. 26 May 2018. 
  45. ^ "Turkish central bank simplifies policy; lira gains". Ahval. 28 May 2018. 
  46. ^ "Turkish Central Bank says it will complete 'policy simplification'". Hurriyet Daily News. 28 May 2018. 
  47. ^ "Turkish economic confidence slumps to lowest in 15 months". Ahval. 30 May 2018. 
  48. ^ "Gama refinancing $1.5 billion latest Turkish debt applicant". Ahval. 30 May 2018. 
  49. ^ "Turkish Central Bank vows tight policy, warns about risks". Hurriyet Daily News. 31 May 2018. 
  50. ^ "PMI posts 46.4 during May". Istanbul Chamber of Industry. 1 June 2018. 
  51. ^ "Turkey Inflation Accelerates in May on Weak Currency". Bloomberg. 4 June 2018. 
  52. ^ "Lira's Rebound From a Record May Preclude Central Bank Rate Hike". Bloomberg. 5 June 2018. 
  53. ^ "Turkish stock market hits lowest since 2008 crisis". Ahval. 6 June 2018. 
  54. ^ "Turkey Central Bank Is Latest to Surprise With Big Rate Move". Bloomberg. 7 June 2018. 
  55. ^ "Turkish car sales at lowest in 4 years show economic woes". Ahval. 11 June 2018. 
  56. ^ "Turkish current account gap widens; portfolio inflows slump". Ahval. 11 June 2018. 
  57. ^ "Erdoğan adviser says high growth doesn't cause inflation". Ahval. 13 June 2018. 
  58. ^ "Turkish lira slumps on renewed concern over economic policy". Ahval. 13 June 2018. 
  59. ^ "Turkish Yields Head for Record While Lira Loses Rate-Hike Boost". Bloomberg. 13 June 2018. 
  60. ^ "Erdoğan says will sanction Moody's after it defamed Turkey". Ahval. 14 June 2018. 
  61. ^ "Turkish lira weakens, market seems to shrug off Erdogan's comments on Moody's". Reuters. 14 June 2018. 
  62. ^ "Company execs flee abroad with 1 billion TL in Turkey's latest ponzi scheme". Ahval. 18 June 2018. 
  63. ^ "Turkey's Economy Under Great Stress After Erdogan's Monetary Remarks". The Globe Post. 22 May 2018. 
  64. ^ "Europas Banken fürchten den türkischen Kollaps" (in German). Die Welt. 29 May 2018. 
  65. ^ "Debt 'contagion' in Argentina and Turkey is spreading to other countries". Businessinsider. 6 June 2018. 
  66. ^ "Why has rating agency Fitch left Turkey?". Hurriyet Daily News. 22 January 2018. 
  67. ^ "Moody's downgrades Turkish debt". Financial Times. 8 March 2018. 
  68. ^ "S&P cuts Turkey's rating deeper into 'junk'". Reuters. 1 May 2018. 
  69. ^ "Storm in Turkey's economy as bonds trade below Senegal's". Ahval. 22 May 2018. 
  70. ^ "Turkish Cypriots consider abandoning sinking lira". Ahval. 22 May 2018. 
  71. ^ "Turkish Cyprus bans foreign currency personal loans". Ahval. 23 May 2018. 
  72. ^ "Jordan to end Turkish free trade agreement". Ahval. 28 May 2018. 
  73. ^ "Turkish growth forecast almost halved at Moody's". Ahval. 30 May 2018. 
  74. ^ "Astaldi May Fetch More Than What It Needs in Istanbul Bridge Sale". Bloomberg. 6 June 2018. 
  75. ^ "İşte köprü gerçekleri". Hurriyet (in Turkish). 2 July 2017. 
  76. ^ "Moody's takes rating actions on 19 Turkish financial institutions". Hurriyet Daily News. 8 June 2018. 
  77. ^ "Top Turkish firms put under review by Moody's". Ahval. 7 June 2018. 
  78. ^ "Fitch cuts Turkey's growth outlook". Ahval. 18 June 2018. 
  79. ^ "Tumbling Turkish lira tests voters' support for Erdogan". Financial Times. 18 May 2018. 
  80. ^ "Forty-two percent of Turks say lira's drop is foreign plot". Ahval. 18 May 2018. 
  81. ^ "Currency crisis "clear operation" against Turkey - Energy minister". Ahval. 23 May 2018. 
  82. ^ "Turkish FM accuses 'some Muslim countries' for trying 'to demolish economy'". Hurriyet Daily News. 30 May 2018. 
  83. ^ "Erdogan Seizes on Growth Figures to Persuade Skeptical Public". VOA News. 11 June 2018. 
  84. ^ "Erdogan's policies driving Turkey to the edge, challenger says". Reuters. 16 May 2018. 
  85. ^ "'Tired driver' is sending Turkey's economy over cliff edge: İYİ Party head Akşener". Hurriyet Daily News. 16 May 2018. 
  86. ^ "CHP presidential candidate Muharrem İnce vows to ensure Central Bank independence if elected". Hurriyet Daily News. 17 May 2018. 
  87. ^ "Muharrem İnce: Turkish economy needs political reform". Ahval. 26 May 2018. 
  88. ^ "Turkey's biggest problems economy, unemployment - survey". Ahval. 23 May 2018. 
  89. ^ "İYİ Party chair Akşener vows to restructure 8 billion-lira debts of 4.5 million citizens". Hurriyet Daily News. 7 May 2018. 
  90. ^ a b "CHP vows to lift emergency rule 48 hours after İnce takes office as president". Hurriyet Daily News. 13 June 2018. 
  91. ^ "I will lift state of emergency day after elections if elected: Meral Akşener". Hurriyet Daily News. 20 May 2018. 
  92. ^ "Emergency rule must be lifted to lure foreign investments: CHP candidate İnce". Hurriyet Daily News. 30 May 2018. 
  93. ^ "Opposition demands investigation of transactions during lira slide". Ahval. 25 May 2018. 
  94. ^ Suzy Hansen (13 April 2017). "Inside Turkey's Purge". The New York Times Magazine. 
  95. ^ "Presidential candidate Demirtas promises youth, women, pension reforms". Rudaw. 9 May 2018.