Tue, Jan 28, 2020
On January 24, 2020, the Bretton Woods Committee hosted a virtual conference, Regional Spotlight: Is Turkey Poised for Recovery or Freefall? which explored the risks and opportunities facing the Turkish economy in 2020 as it rebounds from protracted currency and debt crises in 2018. Featured speakers included Murat Köprülü, Managing Partner at M.E. Markets, LLC, and Timothy Ash, Senior Emerging Markets Sovereign Strategist at BlueBay Asset Management. Gary Kleiman, Co-founder of Kleiman International Consultants moderated the conversation.
In response to a slide of nearly 30 percent against the US dollar in 2018, the Turkish central bank and Erdogan administration briefly tightened fiscal and monetary policy to reign in an overheated economy burdened by a large external financing gap. However, the Erdogan administration is once again prioritizing short-term, credit-driven growth at the expense of structural reforms recommended by the IMF that would improve long-term resilience and stability. Turkey’s weakening economic and financial fundamentals are foreboding of the potential for the economy to come full circle into crisis. Speakers highlighted the following risks and opportunities on Turkey’s road to recovery:
Repeating Pre-Crisis Monetary Policy Mistakes: Finance Minister Berat Albayrak’s ambitious New Economic Plan projects 5 percent growth rates for each year 2020-2022. Pressure on the banking sector to pump credit into the economy to meet these lofty growth targets poses a risk in the medium-term of widening the current account deficit. Since the removal of central bank governor Murat Cetinkaya in July 2019, five straight rate cuts have caused rates to dip below zero. Speakers identified a chronic lack of confidence in the central bank to employ orthodox monetary policy as a primary cause of flagging foreign investment and domestic demand for the lira. In combination with low levels of foreign exchange reserves, these factors will make it difficult for Turkey to defend its currency in the event of a sudden swing in investor sentiment. Speakers cautioned that these conditions suggest that a renewed balance-of-payments crisis is not a matter of if, but when.
Domestic Politics and Tension with the West: The market was concerned about tensions with the West and the prospect for sanctioning by the US in 2019. Strong sanctions could be economically devastating in Turkey and cause a relapse into full-blown recession. The conciliatory response from President Trump helped stabilize the lira and foreign investor sentiment in the short-term, but uncertainty around geopolitical events remains a risk in the future. Meanwhile, poor economic performance has begun to erode popular support for the Erdogan administration, as evidenced by the AKP’s defeat in Istanbul’s mayoral election in 2019. Turkey’s historically strong democracy and a domestic challenge to the AKP’s power from former prime minister Ahmet Davutoglu and former deputy prime minister Ali Babacan’s new political party could bode well for future political and economic stability and the re-empowerment of the CBRT.
Strong Foundation for Growth: Despite Turkey’s precarious recovery, speakers emphasized that the Turkish population’s entrepreneurial, pro-business culture provides an underlying durability to an otherwise vulnerable economy. This foundation, in concert with consistently strong fiscal management on the part of the Erdogan administration and a strong private banking sector, may have prevented total collapse in 2018. These conditions underpin a positive outlook for the economy in the long-term, especially looking forward to a post-Erdogan era that could bring a return to consistent, orthodox monetary policy.