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72 Opinion
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
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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 different to other crises in Turkey, in that the recession was balance sheet in nature – driven by too much FX leverage in banks, and across the system, and the extreme FX devaluation resulting, left NPLs across the system, many still likely hidden by pressures to extend and pretend. Banks and corporates are as a result likely to be slow to go back
“The secret of Erdogan’s electoral success over the past 17 years has been the economy – delivering real GDP growth and jobs”
down the credit growth channel – and official hopes of 15% annual credit growth in 2020 might prove optimistic. Signs are that private sector banks are deleveraging, while they are struggling to access longer term TRY liquidity.
Second, consumers also seem likely to be reluctant to get back to old spending ways quickly. Unemployment remains high, while few people seem to believe the official inflation data. Perceptions will be that real living standards remain under pressure, and any feelgood factor is likely to be in short supply. Demand for credit, from SMEs in particular seems weak.
Third, on the inflation front, dollarisation has continued apace – at least nominally, albeit the authorities point out that with TRY deposit growth now outpacing FX deposit growth the dollarisation ratio is stabilising, even falling,
but from now high levels. But still a high level of dollarisation suggests a fundamental lack of confidence not only in the inflation data, but the broader economic policy making. And I would think that this will be reflected in stalled consumption.
Fourth, global and European growth remains weak, and this has been reflected in export growth data – despite a highly competitive lira now, dollar export growth has disappointed, relatively speaking at least.
I would hence contend that growth will tend to surprise on the downside, perhap coming in more like 3% in 2020. The upside from this is that the current account deficit might actually remain more manageable – closer in fact, to the 1.2% MTP programme. We could also see inflation, at least that reported, also come in towards the bottom end of CBRT forecasts. And