Who is at the sharp end of Turkey’s currency crisis?(Al-Monitor,August 14,2018)
ARTICLE SUMMARY After years of bold borrowing from abroad, Turkish conglomerates, including government cronies, are…
In a Nov. 17 article for Al-Monitor, I had explained why the Turkish economy could be headed for a crisis: “The growth figure for the third quarter [of 2016] is likely to be negative and around 0.5%, meaning that the Turkish economy is contracting for the first time since mid-2009. Moreover, a series of indicators point to a continued slowdown thereafter. In short, the spring for the Turkish economy is over, and it is transiting to a fall season of an unknown length. Whether the fall will give way to winter or a serious crisis also remains unclear.”
On Dec. 12, the Turkish Statistical Institute revealed a growth rate that was well below the expectations — the economy had contracted 1.8% in the third quarter. The existing growth data set, meanwhile, was revisedaccording to European Union accounting norms, which led to a 20% increase in the country’s previous gross domestic product (GDP). The new calculation method sparked lengthy debates and controversy, while producing the worse-than-expected growth rate.
But it didn’t end there. On Dec. 28, the statistical institute revealed the seasonally and calendar adjusted GDP figures, according to which the economy had contracted 2.7% in the third quarter from the second one. Moreover, revised data showed that GDP in the first quarter had shrunk 0.4% from the previous one, followed by a 1.1% growth rate in the second quarter and the bruising 2.7% negative growth in the third one.
Detailed figures paint even a gloomier outlook. The manufacturing industry — the backbone of the economy — continued to shrink for a third quarter in a row, with contraction reaching nearly 5% in the third quarter. The construction sector also plunged into recession in the third quarter, shrinking some 5%. The agricultural and services sectors had contracted by about 1% and 2%, respectively, since the beginning of 2016.
The fourth-quarter figures have yet to be announced, but the downturn is likely to have continued amid shrinking domestic demand and the rapid depreciationof the lira, making for an overall negative growth for the year. This makes Turkey the third emerging economy in a crisis after Russia and Brazil, whose economies are estimated to have contracted 1.2% and 3.3%, respectively, in 2016.
The year 2017 doesn’t bode well for Turkey either, and alarm bells are already ringing. The problems inherited from 2016 are likely to continue at least in the first half of the year. Turbulence in the private sector, banking jitters, increasing unemployment and melting incomes seem inevitable. The core reason for this bleak forecast is the Turkish economy’s reliance on external funds and the fact that those funds have been fleeing the country amid a soaring dollar.
The greenback, which was worth 2.91 liras in December 2015, traded for an average of 3.5 liras in December 2016 — a 20% increase over 12 months, atop a 25% rise in 2015. The slump of the lira accelerated after September 2016, as credit rating agencies cut Turkey to “noninvestment” grade, Donald Trump won the US presidential election and the European Parliament called for freezing Turkey’s EU membership talks. As Turkey’s risk aggregate grew, the flight of short-term foreign investments accelerated, resulting in a 20% more expensive dollar at the year-end.
Many bosses are now losing sleep, for the surge of the dollar came as a bad surprise for private companies indebted in foreign currency and running serious deficits as a result of heavy borrowing since 2010. According to the Central Bank, nonfinancial companies — i.e., companies operating mostly in the industry, construction and services sectors — had a net foreign exchange deficitof $213 billion at the end of September 2016, a staggering 228% increase from $65 billion in September 2009.
The said companies were particularly panicked by the rise of the dollar, and their anxiety further fueled the demand. Each 1-kurus increase in the price of the dollar was adding 2 billion liras to their debt (there are 100 kurus to the lira). So they rushed to buy dollars, hoping to repay debts as early as possible to avoid further losses. For a company trying to repay a $1 billion debt, for instance, the difference between buying dollars for 3.45 and 3.5 liras was 50 million liras ($14 million).
In its Financial Stability Report for the second half of 2016, the Central Bank noted public-private partnership (PPP) projects had contributed to the increase in foreign-exchange (FX) liabilities, and it offered the following assessment: “The manufacturing sector, which realizes more than 90 percent of the total exports in the country, has a significant portion of the FX loans. In the electricity, gas and water, transportation, warehouse and communication, construction and health sectors, the volume of FX usage has increased especially with the recent investments in PPP. Concentration of investments in energy, transportation, health and construction sectors on projects such as renewable energy power plants and distribution, airports, bridges, highway and city hospitals, which have public service purchase guarantees with FX indexed prices, protects firms against credit and exchange rate risks in the long run.”
But despite the bank’s “reassuring” note, companies with FX liabilities are already having nightmares due to dropping exports and decreasing domestic demand. The state guarantees provided for companies involved in PPP projects — or the “megaprojects” as they are usually called — are no reason for relief either, for they mean that the FX risk has extended to public finances as well. And how big is the risk?
The Central Bank report includes the following paragraph on the issue: “A significant portion of the FX loans are estimated to be clustered in the PPP projects. The current total FX debt of firms invested in the PPP projects is estimated to reach 46 billion US dollars under the broadest assumptions. … According to our analysis, about 31 billion US dollars of this figure has protection against exchange rate and demand risks through public service and product purchasing, leasing or indirect guarantees.”
What is even more alarming here is that the Central Bank fails to provide healthy figures on the megaprojects. The figures in the report are referenced to the World Bank and not to the Turkish state, which is supposed to be the primary source of neatly compiled data. Moreover, the World Bank figures are in conflict with those of the Turkish Development Ministry.
Many have been worried that the megaprojects are creating a “black hole” in the country’s public finances. It seems the prospect of a black hole havoc is growing by the day.