Since 2018, the year of the re-election of Turkey’s current President Recep Tayyip Erdogan, the Turkish economy has entered a major crisis several times. Today, Turkey is once again in the throes of a new monetary crisis, forcing the Central Bank of Turkey to disburse huge amounts of its foreign exchange reserves daily to support the Turkish Lira. In this way, the Turkish economy remains unfortified and vulnerable in the face of any type of crisis.
by Thanos S. Chonthrogiannis
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The main causes of this DeJa’Vu problematic economic situation are based on:
1. The inherent weaknesses and pathogenesis of the Turkish economy, based on its large budgetary deficits and not only, and it’s almost complete dependence on foreign capital.
2. From the political and geopolitical choices of the Turkish government with its neighbouring countries that tend to isolate it from reality, creating insurmountable deadlocks at all levels.
Turkey’s geopolitical strategies and the deadlocks they create
Turkey’s adventures in Syria create insurmountable political deadlocks for the Turkish government. The recent deadly attacks by Turkish troops in Syria’s Idlib region create multiple impasses that should draw Turkish public attention in other social field in order the Turkish President to avoid heavy political cost.
Turkish President Recep Tayyip Erdogan has given an ultimatum to Syrian President Bashar al-Assad’s regime by the end of February to withdraw Syrian forces from the Idlib region. The dissident forces against Syrian President Assad’s forces in Idlib region are mainly made up of jihadists and rebels backed by Turkey.
Sochi Agreement (2018), stipulated that Assad’s Syrian troops should remain in their then positions and not occupy the entire Idlib region. On the other hand, Turkish forces were obliged to get rid the Idlib region of Turkey-backed jihadists who were against President Assad’s regime. The size of jihadist forces in the Idlib region reached approximately 23000 fanatical fighters.
But the fact that the Turkish government did not do what was agreed with the “purge” of the jihadists it supported in Idlib region, due to the great political cost that the Turkish government would have had from the thousands of dead and wounded Turkish soldiers in an armed engagement by the Turkish army with the jihadists there, gave the Syrian President Assad Russia-backed the opportunity to retake the entire Idlib region.
Photo by Turk Silahli Kuvvetleri, Source: Voice of America, Licensed Public Domain
Assad’s regime forces in addition to support from Russia, are also supported by Iran’s Revolutionary Guards.
Turkey, and specifically the Turkish military, could retaliate harshly against the Syrian regime for the recent death of its Turkish soldiers in Idlib region.
But the point is that in this case Turkey will be even more involved in Syria’s civil war, without anyone guaranteeing that the blood-strained military operations will achieve the desired military result that will translate into political success.
On the contrary, as the time of military engagement is extended without practical and tangible results and the number of dead Turkish soldiers increase, the greater will be the political cost to the Turkish government.
But on the other hand, Turkish President Recep Tayyip Erdogan knows that if the Idlib region passes the control of Syrian troops, its entire geopolitical strategy with its objectives will be dematerialised.
The objectives of the Turkish strategy in Syria
1. The at all-sacrifice maintenance of the civil war in Syria, with the aim of repelling the sovereignty of the regime of Syrian President Bashar al-Assad from the specific territories of North-Eastern Syria and imposing on those of Turkish rule.
2. The at all-costs containment of refugee flows to the territories of North-Eastern Syria and the Turkish-Syrian border. In recent months, one million Syrians living in the Idlib region of all 3,500,000 Syrians living in the region have headed to Turkey’s mainland to avoid revenge from Syrian President Bashar al-Assad’s troops.
3. If Turkey is forced to leave the Idlib region, it will then be forced to withdraw from the Kurdish-held areas of Syria (Rojava). The plan to invade Turkish troops in the Kurdish areas of Syria was the fight against Kurdish “terrorism”, the creation of a security zone under Turkey’s control in which one to two million refugees would be rescued out of a total of 3.500,000 million Syrians already in Turkey.
Turkey’s refugee-migration problem
The failure of Turkish troops to control the Idlib region and the vengeance of Syrian troops in Idlib against civilians creates new giant waves of refugee flows to Turkey to make them feel safe. Currently, Syrian refugees in Turkey are estimated at four and a half million people.
Photo by Henry Ridgwell (Voice of America), Licensed Public Domain
In fact, this drastic increase in the number of refugees has created a huge political and social impasse in Turkey, given that the dispersion and stay of this large number of refugees in Turkey’s major cities is causing great social tensions and upheavals that Turkish voters are charging for in the failed policies of Turkish President Recep Tayyip Erdogan.
The social decompression valve from this great social pressure and political cost for the Turkish government is to allow the exodus of large numbers of Syrian refugees to the EU via Bulgaria and Greece.
The Turkish opposition denounces the Turkish government and President Recep Tayyip Erdogan for the losses of the Turkish Armed Forces in the Idlib region. On the other hand, nationalists who support the Turkish government are pressing President Recep Tayyip Erdogan for Turkey to declare war in Syria.
The Pressures on the Turkish Economy
The Turkish economy, the Turkish currency, is under a lot of pressure from the results of Turkey’s strategy in Syria. But that’s not all.
Turkish President Recep Tayyip Erdogan’s governments have based their political dominance on their insistence on achieving high growth rates based on cheap borrowing. Turkey’s “economic miracle” was achieved by 2013.
But then the macroeconomic imbalances that occurred in the Turkish economy were based on the timeless policy that affordable cheap borrowing for both businesses and households, to achieve was required by the Central Bank of Turkey to keep Turkish lira borrowing rates at all-costs low.
But this policy by Turkish President Recep Tayyip Erdogan creates a permanent type quicksand as to the investors’ confidence in the Turkish economy and the Turkish Lira equally, since foreign capital avoids investments on the Turkish Lira and the debt instruments of the Turkish government.
Photo by http://www.banknotes.it, Licensed Public Domain
Turkey’s Central Bank is being forced to support the Turkish Lira by selling a huge volume of US dollars in the foreign exchange markets and buying Turkish Lira. The result is:
1. Turkey Central Bank’s reserves drastically reduce.
2. Turkey’s Central Bank is being forced to drastically increase its short-term dollar lending to boost its dollar reserves.
3. This central bank lending is made by Turkey’s commercial banks. Recently this short-term loan reached $4.9 million. As a result, Turkish commercial banks are drying out from dollar assets.
4. The US dollar reserves which are available from the Central Bank of Turkey is up to $35bn, covering only a fifth of Turkey’s (short-term) liabilities to service its foreign public debt.
5. The result shows that the intervention of the Central Bank of Turkey in support of the Turkish currency itself does not pay off and given the fact that the Turkish currency in the last three months has been devalued by 6.5% of its value.
6. Foreign capital investment in stocks of Turkish companies has fallen by $1,6bn in the past twelve months. Capital outflows from Turkish government bonds reached $3bn in the last 12 months to the end of January 2020, thereby limiting the share of foreign investors in Turkish government debt to 11%.
At the same time, the forced lending of the foreign exchange reserves of commercial Turkish banks to the Central Bank of Turkey creates the need to increase the profitability of banks.
Turkish President Recep Tayyip Erdogan’s policy of continuing to provide low-cost lending and transactions to businesses and households forces private Turkish commercial banks to operate at the expense of their profitability and the interests of their shareholders, necessarily becoming an extension of the public sector (they operate as public commercial banks that favour the Turkish Government’s policies at the expense of their profitability and let them operate with deficits that are always covered by the Turkish state budget).
Recently, the Turkish Central Bank announced reductions in the size of the commissions imposed on their dealings with the public by Turkish commercial banks. This will result in a further reduction in the revenues of Turkish commercial banks at an annual rate of at least 15%.
This policy will necessarily lead the administrations of Turkish commercial banks to drastically reduce staff (increase in unemployment rates) and reduce the numbers of their branches inland, making all Turkish banks vulnerable to aggressive takeovers by competitors.
A wave of new mergers between commercial Turkish banks will spark the merger between them with aim to create new banking schemes of stronger economies of scale.
Possible future policies
- In the geopolitical field
1. The EU, the US and Russia will agree to give a much smaller area around the Idlib region than the size of the region given to Turkey with the Sochi Agreement (2018) with aim to give exit to the impasse Turkey has entered into Syria.
But this new Agreement on the size of this region will not last long since both Russia and Iran will help Bashar al-Assad’s forces to oust Turkish troops completely from Syria’s territory, stranding at least four million Syrian refugees and dissidents towards Bashar al-Assad in Turkey territory.
2. It is quite possible that the US will use this predicament in which Turkish President Recep Tayyip Erdogan is to return Turkey back into the arms of the Western camp while giving the Turkish President an escape exit and not with a new coup but protecting him and his family in exile abroad if he agrees to leave Turkish executive power by allowing friendly-Western Turkish politicians to take over the reins of the country.
- In the economic field
1. The Central Bank of Turkey should regain its independence from political policies and all types of interventions in its work, allowing it to adjust its interest rates each time according to the prevailing conditions of the economy.
There must be direct structural intervention by Central Bank of Turkey with an increase in lending rates in order to implement a serious monetary policy.
There will certainly be business bankruptcies and an increase in unemployment, but the simultaneous application of a contraction in public expenditures in the state budget will give the necessary signal to increase foreign investment in the country.
2. Implementation of fiscal austerity policies for three years period with aim to drastically reduce deficits in the Turkish state budget and in the country’s balance of payments.
In this way the Turkish economy will regain its lost credibility by creating the conditions to return to economic orthodoxy by making it the “economic tiger” of the Middle East.
The road is difficult and long but not impossible.
