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November 19, 2020

Macro Series

Global Letter: Groundhog day in Turkey

BY Russell Jones

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( 4 mins)

Turkey has once again succumbed to some of its all too familiar failings.


Plus ça change, plus c’est la même chose

We at Llewellyn Consulting have long argued that some economies behave as if they are prisoners of their own history. There often seems to be something in a country’s collective DNA that encourages it to go down similar paths, make similar policy errors, and endure similar crises over and over again.

Reinhart and Rogoff’s magisterial historical analysis of financial trauma, This Time is Different, provides a good deal of chapter and verse on such proclivities, in the process identifying a number of ‘serial sovereign defaulters’, of which Argentina and Greece are two of the most notorious. 1 But as they also note, the tendency for macroeconomic recidivism is not confined just to debt defaults: it also extends to inclinations toward financial boom and bust, inflation, and balance of payments crises, if not some combination of them all.

Against this background, while recently sorting through some old files, I came across a paper that I had written about Turkey in 1994. Turkey had for some years attracted attention in the investment community as an underdeveloped economy with huge potential. But at the time it was in the midst of a major crisis marked by already all-too-familiar traits. It was running onerous twin deficits; monetary growth had run out of control; annual CPI inflation was headed towards triple digits; the Turkish lira was in freefall; foreign exchange reserves were draining away; ‘dollarization’ was gathering momentum; and the then prime minister and central bank were at loggerheads.

I had been sent to Ankara by my employers to talk to central bank and government officials, business leaders, and private sector economists, and then come back to recount my findings to the bank’s internal risk managers and client base. This is the summary of those findings:

Turkey’s proneness to crises akin to the current debacle will be overcome only when it weens itself off credit-driven growth, and undertakes root and branch improvements in its institutional architecture and systems of governance. In the meantime, the IMF will have to sort this particular mess out. 2

Beset by imbalances

No doubt, Turkey has become a much larger, more mature, and sophisticated economy over the past 25 or so years. It is also blessed with a young, well-educated, entrepreneurial workforce and, as the world’s nineteenth largest economy, has achieved considerable convergence vis-à-vis the advanced nations. Hence, it has remained a focus of the global investment community.

Unfortunately, however, investing in Turkey has remained something of a white knuckle ride. For all its achievements, it has been through several crises similar to that of 1994. Moreover, the synopsis presented above could have been written yesterday. CPI inflation has been in double digits for four years, and is now close to 12%, the second highest rate in the G-20. Despite extensive fx intervention and the effective exhaustion of official reserves, the lira has plumbed a succession of historical lows in nominal and real effective terms. 3 Credit growth and broad monetary growth have accelerated sharply and are running around 45% y-o-y. The primary budget deficit has been increasing for five years, and will account for some 8% of GDP this year. And after a single, rare year of surplus in 2019, the external balance is back in deficit, to the tune of some 4% of GDP.

In the meantime, economic policy has been characterised by short-termism, a series of highly unconventional and contentious monetary policy initiatives, and the arbitrary sacking of respected officials and their replacement with appointees selected seemingly more for their loyalty to the President than for their technical expertise.

Over the past week or so, however, matters appear to have come to a head with, finally, some recognition that the situation Turkey has found itself in is increasingly unsustainable. New, more mainstream, appointments have been made to head both the finance ministry and the central bank. Hopes of a profound change in the direction of economic policy have encouraged a sharp rally in the lira. But any significant strategic reorientation may yet founder at the feet of the autocratic, unorthodox and quixotic Recep Tayyip Erdogan, who is also violently opposed to seeking IMF assistance. And, of course, we have been here so many times before. ◼

1 Reinhart. C., and Rogoff. K. 2009. This time is different. Eight centuries of financial folly. Oxford University press.

2 It did, providing a large stand-by credit in return for a dramatic re-orientation of fiscal and monetary policy.

3 Once borrowings and other liabilities are taken into consideration, Turkey’s fx reserves are deeply negative, to the tune of some $50bn at the end of September.

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