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of Halkbank suggests any decisions being made as to how to defend against the SDNY court case very likely are being made by the bank’s political masters. And this would raise the broader question as to whether the Halkbank owners, in this case the state, accept US regulatory oversight on Turkish financial institutions in general.
Can Turkish financial institutions be expected now to accept US jurisdiction? How will international banks view their Turkish counterparts and the veracity of contracts which might be eventually contested in the US courts?
These are huge issues for Turkey, potentially. I would also expect issues around the Halkbank case to be detailed in the looming FATF [Financial Action Task Force on money laundering] annual report in Turkey. Concerns are likely to be highlighted which could well have broader resonance across the markets. Continuation on the current path, would eventually risk warnings around FATF grey listing.
Surely the Halkbank case could have been settled some months ago in a conciliatory manner from both sides. Some liability could have been accepted, a modest fine paid, behaviour changed and both sides could have moved on. But at present we seem locked in escalation mode, which seems unlikely to end well—not for Turkey at least.
It’s the economy stupid!​. True, the secret of Erdogan’s electoral success over the past 17 years has been the economy—delivering real GDP growth and jobs, significantly helped along the way by foreign credit-fuelled investment.
The Erdogan model has appeared seriously under threat over the past 12-18 months, as economic mismanagement, primarily reflected in overly loose monetary policy and Erdogan’s total erosion of central bank independence, left the lira brutally exposed last year. Currency collapse, followed by belated and consequently then extreme interest rates hikes, resulted in the brakes being slammed on, and a massive deflation ensuing. Domestic demand collapsed, unemployed soared and non-performing loans increased markedly.
Anti-crisis measures eventually stabilised the ship—but at the price of elevated inflation, eroded living standards and lost output. AKP popularity declined and to some extent this was reflected in the party’s poor showing in municipal elections early in the year.
There are now some signs of stability, even recovery. Output has bottomed out, and higher frequency indicators are suggesting a return to growth. The collapse in domestic demand, a huge nominal and real depreciation of the lira has helped turn around the external accounts—a USD54bn current account deficit has turned into a USD4-5bn surplus.
High policy rates, the maintenance of a current account surplus, and aggressive micro management of the FX regime—closing, in effect the offshore TRY swap market—stabilised the lira. Now real FX depreciation, depressed domestic demand, and base effects are crashing inflation lower—from 25% a year ago to 8-9% at present. To some extent, the turnaround is remarkable—and policy elites are now quick to take the credit, albeit some of them were on watch in the run-up to the crisis. The CBRT has been able to cut policy rates by 1000bps or so now in the past six months, and this is all creating hopes of a V-shaped recovery, with the government’s medium-term programme suggesting 5% real GDP growth in 2020. The MTP also assumes the current account deficit holds to just 1.2% of GDP, and the budget deficit keeps to below 3% of GDP.
Frankly, this rosy outlook seems unrealistic​.
First, there is much to suggest that the 2017-2018 downturn/recession was
15​ TURKEY Country Report​ December 2019 ​ ​www.intellinews.com