Andreas Charalambous and Omiros Pissarides
Back in September 2020, when we reviewed the negative performance of the once-rapidly growing Turkish economy, we felt that the country’s economic policy had reached an impasse.
Almost a year later, the combined impact of the pandemic and President Erdogan’s ongoing, and ideologically motivated, policies have further deepened the negative footprint. As a direct result of the pandemic, the sharp decline in tourism has fuelled an excessive exchange reserves deficit, causing the government to announce a strict lockdown in the hope of safeguarding the summer season. The roots of the genuine problem, however, lie in the transformation of economic policy into a political tool. More specifically, the government’s overriding goal continues to be the preservation of a low interest rate environment in a rather desperate attempt to stimulate growth. This would be effective had inflation been low, evidently not the case in Turkey where prices are rising at double digit rates. By supplying cheap funds to businesses and households inflation is essentially eroding the exchange rate value of the Turkish lira.
President Erdogan’s recent move to oust the Turkish central banker for a fourth time in two years is indicative of his intentions. Unlike his predecessors, who spent more than $100 billion in foreign exchange interventions, the ex-central banker Naci Ağbal was the only one who successfully kept the pound from slipping by consecutively increasing interest rates. The third and largest interest hike was the one that marked his expulsion.
The reality for the Turkish economy appears bleak: inflation has exceeded 16 per cent, the lira fell by 30 per cent in 2020, public debt continues to rise, while foreign exchange reserves have shrunk to about $15 billion. Noticeably most sovereign debt is in dollars, making its repayment harder as the lira continues to devaluate against the dollar and other major currencies. Similarly, the debt of large Turkish companies is also denominated in dollars, causing them to resort to massive restructurings, thus placing further strain on banks’ balance sheets during an already difficult period because of the pandemic. Not coincidentally, therefore, the country’s net position of foreign capital inflows/outflows is negative, while international credit rating agencies have repeatedly downgraded the Turkish sovereign debt.
It would not be an exaggeration to state that the situation is extremely difficult. Although Turkey continues to be one of the largest markets in the world, it has found itself in a whirlpool of continuous negative developments, allowing little or even zero room for complacency. The recent aggravating developments in the local cryptocurrency market, as well as the imminent trial of the Halkbank scandal, further demonstrate the existence of severe supervisory shortcomings and contribute to the retention of a negative climate.
The Turkish government will soon have no choice but to attempt another radical turnaround in its economic course. Turning attention to neighbouring countries, including Cyprus, the lack of economic and political stability is not a good sign and the consequences for the Turkish Cypriot economy are particularly severe.
Andreas Charalambous is an economist and a former director of the Ministry of Finance. Omiros Pissarides is the managing director of PricewaterhouseCoopers Investment Services