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October 22, 2019

Turkish economy overheats

Turkish economyThe Turkish economy overheats and this could be just as much a problem for President Recep Tayyip Erdoгan as for the country’s creditors. The Turkish president needs guarantees that there will be no economic difficulties threatening his chances in the next election. The TRY is bending under the weight of the growing current account deficit and double-digit inflation of the background of rapidly growing domestic GDP of 851 billion USD.

Erdogan, who wants to formalize his own government during the presidential election next year, needs to be assured that there will be no hardship to threaten his chances. However, signs of upcoming problems are increasing.

The external debt burden on foreign companies accounts for about 40% of economic output. The expensive loans like the 7 billion USD loan that Yildiz Holding is trying to renegotiate, and unpaid 4.75 billion USD, linked to the purchase of a leading Turkish telecoms company, are raising questions about the state of corporate balance. The payment problems will also affect banks, which represent one-third of the total value of stock markets.

While investors are calling for more cautious economic policies, the government does not want to take action that could mitigate movements in consumption growth. The exchange rate is the first place where the impact of this policy choice will fall. It has become costly for foreign bond holders and international banks who have seen a return on their investments after years of supporting the expansion of the largest economy in the Middle East. This also fosters the perception among some investors that the economy expands with loans before the next election.

The economic slowdown is not Erdogan’s style. He also points out that investors are already asking themselves how long this can go without adjusting or selling the TRY. The currency ended its worst quarter for more than a year, reaching a record low last month after Moody’s downgraded Turkey’s credit rating, warning that the government’s short-term focus undermined effective policies. The company also said that despite the low probability that the risk of a balance of payments crisis has risen more than expected a year ago.

In an attempt to keep foreign capital inflow, the Turkish Central Bank raised interest rates by more than 400 basis points since early 2017. But last year’s government-backed credit incentives made much of this tightening irrelevant, increasing loan growth to 40%. The inflation is above 10% for the eighth consecutive month in March – more than double the central bank’s targets.

At the same time, the last time Turkey relied so heavily on foreign funding, there was no inflation in the US, and the danger of an international trade war did not affect the mood of investors.

If the Turkish currency continues to fall, the inflation may reach 13-14%, forcing the central bank to further raise interest rates.

The expectations for turbulence in the economy fuel speculation for early elections. According to investors, Recep Tayyip Erdogan, who is on the brink of a wave of nationalist sentiment after Turkish army successes against the Syrian Kurds, could pull forward the vote instead of taking the risk of voting during a sharp economic downturn.

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