Turkey Has To Win Investor Confidence

Turkey's inflation reached annual highs of 12.98% last NovemberTurkish inflation reached annual highs of 12.98% last November

The situation in Turkey is a good example of the negative consequences of stances which call into question the independence and credibility of the central banks.

Turkish inflation reached annual highs of 12.98% last November and, despite moderating later, recorded levels of 10.85% in April. Figures not seen since 2003, taking us back to times when Turkey’s problems were more than just about inflation as it faced the impact of a tough banking crisis. Its climax was at end-2000, beginning 2001. Support from the IMF was essential, as well as the implementation of a series of measures which, in spite of the debate, served to strengthen the country’s economic fundamentals. These included the ambitious programme of privatisations which reduced the state’s influence on Turkey’s economic activity.

The crisis at the beginning of this century forced credibility to become the core of Turkish economic policies, both from an internal and external point of view. A credibility which was achieved, in the main, by maintaining healthy public accounts. In fact, the public deficit only suffered tensions between 2008 and 2010, coinciding with the Great Recession when it reached highs of 5.9% of GDP. That said, since 2011, the deficit has been on average 1.6% in an environment where the reduction in revenues, which slightly exceed levels of 30% of GDP, has been offset by containment in spending.

That said, it’s the future that’s important and the public deficit is seen getting worse, reaching levels of 3% in an environment where the brakes have been put on activity, as Turkey is expected to grow 4% this year compared with 7.4% in 2017. Then past revenues from the public accounts are no longer worth anything and the Turkish authorities will have to do a lot more to win investors’ confidence. The structurally high rates of inflation in the country are a serious problem and the centralisation of power there is bad news in terms of being able to deal with them. As we said at the beginning, the central bank’s independence is more than just being questioned: a situation which has been very visible in the last few years and, especially, weeks. The deterioration in the decision-making process in the economic sphere is a reality. This can be seen in the reactive moves from the central bank in comparison with the proactive stance which it should have.

Against this backdrop, the doubts raised by the main rating agencies are logical. And they have, in the final analysis, led to the latest crisis. Currently, the deteriorating credibility of Turkey’s institutions make it fairly difficult for actions like the increase in rates (last week they were raised by 300 bp) to attract capital flows.

So attention should be turned towards a trade deficit which was 9% of GDP in 2017 and accompanied the rise in the current account deficit to -5.6% in the same year, which we expect to exceed 6% in 2018.

The most appropriate thing is to focus on a wider measure like gross external debt. Up until 2012, this had remained below 40% of GDP on a fairly recurrent basis. But this situation has changed in the last few years, as it has followed an upward trend, reaching 53.2% of GDP at end-2017. So the 13.8% burden of external debt in the short-term in Q4’17 will now be greater and one of Turkey’s main challenges.

Along with the points mentioned earlier, Turkey’s net international investment position is not favourable with a negative balance of $-443.702 billion in Q1’18. And its international reserves, although not insignificant, totalled $110.288 billion in March, an insufficient amount for dealing with a strong deterioration in the currency.

The short-term problems exposed are mixed in with the need to not give up on the process of modernisation. Nearly a quarter of the Turkish population works in the agriculture sector. And, in spite of the development of industrial activities with greater added value, textile and agro-agricultural activities continue to play an important role in the country’s manufacturing sector and its exports, which are over 20% of GDP. Furthermore, 17% of the population live below the poverty line and 40% of the population are under 24.