Post by Oz-T on Aug 14, 2018 3:15:54 GMT
Two months ago, I was in Turkey. Primarily, it was a holiday, but there was another factor that interested me: an unfolding problem with Turkey’s economy, and I wanted to visit this country before things turned really bad. Elections were due in November 2019 so I thought a 2018 trip would be suitable, assuming that stability would hold until after the election, then it was a wild guess how long after that election until the wheels would fall off. I got the first bit right, but not the election timing – Turkey’s president suddenly brought forward the election to 24 June this year. So our two weeks in Turkey had an election campaign happening in the background, although the candidate posters and banners were everywhere to be seen.
We enjoyed our trip to Turkey and I’ll post a travel tale about it when I’ve finished writing it. But this is a separate discussion about the intervening economic issues to explain what is happening there. And before I start, I’d like to make the point that we felt safe in Turkey. How would I feel if our tour was about to start now? Pretty much the same. I’d still go, but I’d make doubly sure that I replicated the way I managed finances. More on that later.
The first observation I will make about Turkey is that almost all of the current crisis began a long time ago – so ignore President Erdogan’s shrill comments blaming the US president, money markets etc. The fact is that Turkey borrowed too much and did so in foreign currencies (US dollars, Euros etc). The assets funded by that debt mainly produce income in Turkish lira, so that set up a huge, unhedged risk if the Turkish currency fell. That made Turkey vulnerable if anything went slightly wrong. Erdogan is a tough, autocratic politician (in some ways he’s a bit like Putin) and he worsened that vulnerability by exercising control over interest rates, keeping them down. Instead, he should have left monetary policy to an independent central bank to adjust them upward if necessary to control the splurge into debt. Erdogan created a nice, ‘comfortable’ economic climate for a president heading toward an election.
Those low interest rates prompted a borrowing binge and a ‘robust’ but temporary ‘boom’ in the years up to 2017. But what plays out well for your domestic voters in the short term doesn’t necessarily work the same way with your trading partners and markets in the long term. Low interest rates caused money to leave Turkey for better rates elsewhere and the result was a gradual fall in the value of the Turkish lira. Then the fall continued. Then confidence began to fall away. Just two weeks ago, the lira had lost 40% of its value in this calendar year. Banks are now vulnerable.
Then we have quite a few political problems in the mix. Erdogan is an authoritarian; he suppresses media dissent, interferes with the judiciary, imprisons journalists, bullies the central bank into adopting his policies and imposes censorship. When I was there, I could not access Wikipedia because it’s blocked in Turkey. Last May, Erdogan said that after the election he would ensure interest rates remain low (he adopts an Islamic concept of interest being fundamentally evil). This horrified investors who expect interest rates to rise in order to keep inflation in check and to keep the currency stable. Inflation is running at about 11% at the moment – around five times what it should be. But in June and July it’s suddenly surged to 15%. This low interest rate policy is simply unsustainable, but any increase is going to seriously hurt businesses and households.
And then there’s the problem of Andrew Brunson, the American pastor who’s been locked up in Turkey on the suspicion of being a spy for the Kurds. It’s gone on too long and President Trump made an ultimatum last week for his release, which Erdogan ignored. Trump was already angry about Erdogan bypassing US sanctions in buying oil from Iran and his mood was dark. So Trump doubled the tariffs on Turkish steel and aluminium last Friday, delivering an enormous blow to Turkey. Suddenly, markets reacted: here was a full-on political stand-off between two stubborn, hardliner presidents and it has now overflowed into trade, with disastrous consequences for Turkey. The Turkish lira immediately fell 13%.
Erdogan is trying to tough this out, especially blaming Trump, markets and anybody but himself. But the seeds of Turkey’s economic plight were sown by Erdogan many years earlier. In the last ten years, the lira has fallen more than 80% against the USD – that’s the reality of the systematic mess they are in. Turkey is now in a classic ‘debt and currency’ crisis, made worse by the fact that Erdogan is too stubborn to admit his failures, much less take the hard medicine that’s required to fix it.
To me, the most urgent requirement is to stabilize the currency and the easiest solution is to peg the Turkish lira to a stable, large currency. That really means stapling it to the Euro or the US dollar, with the latter being the better choice. But could Erdogan, the fiercely independent authoritarian who keeps denouncing the USA actually bring himself to the humiliating decision to do that?
Meanwhile, the lira continues to plunge and this has instability implications for the region, as well as global markets. Markets will get spooked by this and reassess their exposure to other developing countries with huge debts. We’ve heard plenty over the years about how Greece was bankrupt and causing so much trouble to the Eurozone countries. And Turkey? Economically, Turkey is four times larger than Greece. This could be a huge problem and it’ll turn into a catastrophe if Turkey defaults on its debts. Even if Turkey self-manages this well, I’d expect them to go into recession. And badly managed? That could mean worse. Is Turkey the economic spark that sets off a chain of events that leads to a global collapse? Maybe not, but I wouldn’t entirely dismiss that as a possibility.
My couple of weeks in Turkey last June allowed me to get a first-hand appreciation of the early effects. The people in the large cities of Istanbul, Izmir etc were extremely friendly, as were those from regional areas. There was a clear mood of concern about their economy and tourism has suffered in recent years, mainly due to westerners being troubled by the problems in Syria, which shares the south-eastern border. When we were in Greece, our cruise ship line was the only one still visiting the Turkish mainland. But the Turkish people seemed as though they knew there were tough times ahead and would be as positive as possible. But then again, the real crunch hasn’t happened yet.
To repeat: I would still travel to Turkey and there would be no reason why I would cancel an already booked tour. But I would ensure that I had full travel insurance to cover any cancellations (which I do anyway). If there is a liquidity crisis, ATMs might not dispense all the cash you require (withdrawal limits happened in both Greece and Cyprus during their worst moments). We never used an ATM in Turkey anyway because nearly everything was pre-purchased via the tour company (Neon Tours) and I brought sufficient cash to pay for meals and a few other expenses. I also had a pre-loaded debit card that used the Visa and Mastercard networks, thereby avoiding the need for cash. That’s the formula that would work well if Turkey did suffer cash restrictions.
Turkey remains a fantastic destination and as we’ve seen from the Greek experience, a country’s financial plight does not necessarily make it a no-go zone. Always consult your local government authority as to whether any travel destination is safe or not.
We enjoyed our trip to Turkey and I’ll post a travel tale about it when I’ve finished writing it. But this is a separate discussion about the intervening economic issues to explain what is happening there. And before I start, I’d like to make the point that we felt safe in Turkey. How would I feel if our tour was about to start now? Pretty much the same. I’d still go, but I’d make doubly sure that I replicated the way I managed finances. More on that later.
The first observation I will make about Turkey is that almost all of the current crisis began a long time ago – so ignore President Erdogan’s shrill comments blaming the US president, money markets etc. The fact is that Turkey borrowed too much and did so in foreign currencies (US dollars, Euros etc). The assets funded by that debt mainly produce income in Turkish lira, so that set up a huge, unhedged risk if the Turkish currency fell. That made Turkey vulnerable if anything went slightly wrong. Erdogan is a tough, autocratic politician (in some ways he’s a bit like Putin) and he worsened that vulnerability by exercising control over interest rates, keeping them down. Instead, he should have left monetary policy to an independent central bank to adjust them upward if necessary to control the splurge into debt. Erdogan created a nice, ‘comfortable’ economic climate for a president heading toward an election.
Those low interest rates prompted a borrowing binge and a ‘robust’ but temporary ‘boom’ in the years up to 2017. But what plays out well for your domestic voters in the short term doesn’t necessarily work the same way with your trading partners and markets in the long term. Low interest rates caused money to leave Turkey for better rates elsewhere and the result was a gradual fall in the value of the Turkish lira. Then the fall continued. Then confidence began to fall away. Just two weeks ago, the lira had lost 40% of its value in this calendar year. Banks are now vulnerable.
Then we have quite a few political problems in the mix. Erdogan is an authoritarian; he suppresses media dissent, interferes with the judiciary, imprisons journalists, bullies the central bank into adopting his policies and imposes censorship. When I was there, I could not access Wikipedia because it’s blocked in Turkey. Last May, Erdogan said that after the election he would ensure interest rates remain low (he adopts an Islamic concept of interest being fundamentally evil). This horrified investors who expect interest rates to rise in order to keep inflation in check and to keep the currency stable. Inflation is running at about 11% at the moment – around five times what it should be. But in June and July it’s suddenly surged to 15%. This low interest rate policy is simply unsustainable, but any increase is going to seriously hurt businesses and households.
And then there’s the problem of Andrew Brunson, the American pastor who’s been locked up in Turkey on the suspicion of being a spy for the Kurds. It’s gone on too long and President Trump made an ultimatum last week for his release, which Erdogan ignored. Trump was already angry about Erdogan bypassing US sanctions in buying oil from Iran and his mood was dark. So Trump doubled the tariffs on Turkish steel and aluminium last Friday, delivering an enormous blow to Turkey. Suddenly, markets reacted: here was a full-on political stand-off between two stubborn, hardliner presidents and it has now overflowed into trade, with disastrous consequences for Turkey. The Turkish lira immediately fell 13%.
Erdogan is trying to tough this out, especially blaming Trump, markets and anybody but himself. But the seeds of Turkey’s economic plight were sown by Erdogan many years earlier. In the last ten years, the lira has fallen more than 80% against the USD – that’s the reality of the systematic mess they are in. Turkey is now in a classic ‘debt and currency’ crisis, made worse by the fact that Erdogan is too stubborn to admit his failures, much less take the hard medicine that’s required to fix it.
To me, the most urgent requirement is to stabilize the currency and the easiest solution is to peg the Turkish lira to a stable, large currency. That really means stapling it to the Euro or the US dollar, with the latter being the better choice. But could Erdogan, the fiercely independent authoritarian who keeps denouncing the USA actually bring himself to the humiliating decision to do that?
Meanwhile, the lira continues to plunge and this has instability implications for the region, as well as global markets. Markets will get spooked by this and reassess their exposure to other developing countries with huge debts. We’ve heard plenty over the years about how Greece was bankrupt and causing so much trouble to the Eurozone countries. And Turkey? Economically, Turkey is four times larger than Greece. This could be a huge problem and it’ll turn into a catastrophe if Turkey defaults on its debts. Even if Turkey self-manages this well, I’d expect them to go into recession. And badly managed? That could mean worse. Is Turkey the economic spark that sets off a chain of events that leads to a global collapse? Maybe not, but I wouldn’t entirely dismiss that as a possibility.
My couple of weeks in Turkey last June allowed me to get a first-hand appreciation of the early effects. The people in the large cities of Istanbul, Izmir etc were extremely friendly, as were those from regional areas. There was a clear mood of concern about their economy and tourism has suffered in recent years, mainly due to westerners being troubled by the problems in Syria, which shares the south-eastern border. When we were in Greece, our cruise ship line was the only one still visiting the Turkish mainland. But the Turkish people seemed as though they knew there were tough times ahead and would be as positive as possible. But then again, the real crunch hasn’t happened yet.
To repeat: I would still travel to Turkey and there would be no reason why I would cancel an already booked tour. But I would ensure that I had full travel insurance to cover any cancellations (which I do anyway). If there is a liquidity crisis, ATMs might not dispense all the cash you require (withdrawal limits happened in both Greece and Cyprus during their worst moments). We never used an ATM in Turkey anyway because nearly everything was pre-purchased via the tour company (Neon Tours) and I brought sufficient cash to pay for meals and a few other expenses. I also had a pre-loaded debit card that used the Visa and Mastercard networks, thereby avoiding the need for cash. That’s the formula that would work well if Turkey did suffer cash restrictions.
Turkey remains a fantastic destination and as we’ve seen from the Greek experience, a country’s financial plight does not necessarily make it a no-go zone. Always consult your local government authority as to whether any travel destination is safe or not.