I WILL NOT be elliptic this time! Here are the facts: The economy will be out of steam in the long-run because it has exhausted drivers that shored up its growth potential in the 2010s. Hence, it took a long while not only to lose hard won credibility but also erode the material bases of capital formation and productivity enhancement that were procured by the Dervis-IMF programme of 2001. It is akin to “seven years of plenty” between 2001 and 2009-cum-yet another round of easy access to cross-border flows after 2008-09, and a full-fledged regression after 2013.
However, there has never been any elaborated economic programme depicting a well-defined industrial policy going forward since 2001. Therefore, all there is now is the legacy of two decades ago. The AKP didn’t add an iota either to manufacturing or to productivity or to planning in order to forge ahead. Instead, the economy is left to the whimsicalities of portfolio investments and the opportunity to borrow foreign currency at low cost has already been used up by the private sector for about more than a decade. In the absence of an intellectually refined and internationally acceptable piece of economic thinking, the country’s economy is at the mercy of shortterm capital movements, financial prowess and suchlike.
Yet another fact is that the workforce is no longer well-trained, unready for AI and other automation globally, and a massive structural unemployment looms large on the horizon as total factor productivity (TFP) fades away. An entire decade has been lost already. This was bound to happen if capital formation shifts from technology-driven tradeables sectors to non-tradeables-construction and suchlike.
RESERVES AND THE LIRA
Consider the CBRT’s net foreign assets. At the peak they stood at USD 62.1bln in July 2011; now they are at USD 20.4bln – a contested figure obviously. In fact, net reserves are negative. They were positive in September 2008, i.e. USD 49bln. The lira depreciated sequentially since May 2013 if we take Bernanke’s speech that triggered the ‘taper tantrum’. Reserves are important because there is a lot to be rolled-over within 12 months, USD 175bln to 190bln, and no ammunition is present in the arsenal. This is despite many rounds of rate hike and rate cut cycles, so much reserves being depleted in order ‘to defend the currency’ – actually this kind of unilateral intervention is tantamount to a wealth transfer – and so many times the net errors & omissions came to the rescue. The result is obvious: the economy is always weak in the sense that it is not competitive internationally and can’t generate enough export revenue, and the lira has been going under trend-wise over the last seven years. This is a model that can barely stay afloat. Moments of staying afloat have been vindicated as growth momenta, which is in fact untrue. All these are predicated upon credit (debt) possibilities. The whole nation is indebted now, corporates and households alike. Yet Turks are accustomed to consume at the slightest opportunity, even if this means engendering further debt. Hence, the V-shaped recovery from the pandemic that we are witness numerically is at the same time real and also indicative of harsh long-term realities. In Q4, stagnation may set in though. Even so, in 2021 the current account deficit that is now heading towards USD 30bln will shrink – less imports + more tourism revenues – and on account of the base effect, GDP growth will be positive, maybe 3% and higher.
This is a possible scenario. It depends on a couple of policy moves. First, all swap and other restrictions imposed to financial actors should be revoked, and innovations like the active ratio abandoned swiftly. Second, CBRT interest rates need to rise further, by least 200 basis points more, in a direct fashion if credibility is to be restored. Third, all signs of financial repression that alluded to something like the prelude to imposing capital controls ought to be dismantled, and lira investors should be satisfied with 2-3% ex ante real TRY deposit rates. This might prevent asset dollarization from rising further. If all these are done in a clear manner, then perhaps FX-debt can be rolled-over during the winter at acceptable costs. Not raising the TRY rate may result in paying a much higher USD interest rate for syndications, Eurobond issuances and more. Excessive rate cuts lead to higher rates almost surely, albeit slowly, and this is what is happening now. The day of reckoning has come. Raise the TRY policy rate, and the result is likely to be lower long-term TRY rates and lower long-term FX borrowing rates when you tap international capital markets because CDS would fall. It is about restoring confidence.
PUBLIC FINANCES NO LONGER A BUFFER
There is no way to stimulate the economy further even though COVID-19 is still spreading. Because all ammunition was used before, the outbreak couldn’t be met with sound financial measures, and households weren’t paid adequately at the crucial moment when perhaps the whole country should have been locked down for a month or so. Now, bygone are bygones, and the credit boom has also played its role in keeping domestic demand relatively strong when millions were sent home. From then on only the negative repercussions of the policy choices of the last 14 months will be played out.
The rapidly widening budget deficit+primary deficit tells us that now debt +currency depreciation + the near loss of the fiscal anchor + external deficit point to a short-lived V followed by a longer tail. If come summer 2021 tourism is back on track, fine. If not, another USD 20bln tourism revenue loss will have undesirable consequences. It is all a matter of time from the viewpoint of foreign exchange balances and debt redemptions. This is why the ultimate inevitability of tapping the IMF is being mentioned by analysts here and there, and this is why rating agencies issue warning after warning. One can’t rely on swaps with Turkish banks all along; this isn’t freshly earned currency. This is the money already in the system that only changes location within the system. This isn’t even swap with new international sources.
PRODUCTIVITY, CONSTRUCTION, CAPITAL FORMATION
The real question, one that the private sector, especially SMEs, ought to address is “what then?” Suppose debt is rolledover again, suppose GDP growth picks up a bit, mostly due to the base effect but also because a vaccine is found, etc., in 2021. What will happen after that? What will happen after so many unemployed are out of the workforce? To whom will firms sell their products? What will happen when and if technological change all of a sudden gains speed and hidden scientific innovations are released to the global economy? Should Turkey respond to the post-COVID era with more construction, more borrowing, more TRY depreciation, vacillating policy moves and incessant stop-go cycles? When will the private sector itself understand fully that insisting on the current growth model can only make sure both tangible and intangible capitals of the country are being rendered obsolete? Making money doesn’t mean capital formation is solidly grounded. In my opinion, all sectoral priorities should change radically and quickly. If nothing will happen, then I think a slow but sure pauperization process accompanied by institutional decline and the knowledge erosion of the extant human capital lies ahead. This isn’t a joke. Who can travel or send their sons and daughters to study say at leading Western universities at such exchange rates? Who can import? Who can effectively demand imported cars at such currency levels?
Everything needs to be reset. First the monetary policy reversal that we are witnessing now should continue and turn into the great undoing. Second, the growth model should be completely revised, recast, revitalized, and reinvigorated in close cooperation with the private sector, mainly industrialists. Then enters politics…
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