Is the Turkish Economy going ‘bankrupt’?

Authored by: Georges Gritsis

Is Turkey already bankrupt?

Countries do not “go bankrupt”.

They can however default.

A default occurs when the Treasury can no longer service (pay the interest due on) its debts.

Japan’s gross government debt ratio stands around 230% of GDP but interests are negative : -0.091% for its 5 year bond. In other words investors pay the Japanese Treasury to park their money in Japanese bonds.

Japan Current Account (government revenue minus expenses) recorded a surplus of 14.5 USD bn in Jan 2021, compared with a surplus of $20.0 bn in the previous month. Yearly this represents 3% of GDP.

France’s gross government debt ratio stands around 118.74% of GDP but interests are equally negative : -0.524% for its 5 year bond.

Due to the pandemic France recorded 0,7% to GDP current account deficit.

Turkey’s gross government debt ratio stands at a very moderate 57.1 % of GDP but interests rates now are 19.10% for its 5 year bond.

At these 19.10% rates, the treasury will need to fork out US $82,6 bln to service its debt from a total revenue of $147 bln, in other terms spend 56% of its yearly revenue. Obviously should rates spike, this percentage will increase accordingly.

Reference: Turkey’s 2020 current account deficit at $36.7B: CBankEconomy of Turkey

“A longstanding characteristic of the economy of Turkey is a low savings rate, compared to mature economies.

Reference: “How Turkey fell from investment darling to junk-rated emerging market”The Economist. 19 May 2018.

Millionaires leaving

Turkey’s labour force participation rate of 56.1% in 2018 was by far the lowest of the OECD states which have a median rate of 74%. For 2019 participation decreased to 44.56%, probably reaching 40% (or less) in 2021. In comparison France’s labour force participation rate stood at 71.40% and unemployment at 8,5%.

While some 160,000 Turkish nationals qualify as US$ millionaires, according to New World Wealth estimates, since 2016 more than 6.000 high net-worth individuals (HNWIs, defined as holding net assets of at least US$1 million) have left the country every year, reasons given being government deterring investment and loss of currency value against the U.S. dollar.

Since under the government of R.T. Erdogan, Turkey has been running huge and growing current account deficits, reaching $51.6 billion in 2018, one of the largest current account deficits in the world.

Due to the pandemic, current account deficit reached $36.7 billion in 2020.

The economy has relied on capital inflows to fund private-sector excess. Turkey’s banks and big firms borrowing heavily, often in foreign currency. Under these conditions, US$ 200 billion a year must be found to fund the wide current account deficit and maturing debt, always at risk of inflows drying up.”

Basically Turkish economic policy makers are now between a rock and a hard place

In order to fight inflation and attract foreign investors to purchase Treasury bonds, interest rates need to be higher than inflation. This in turn also appreciates local currency, an important factor when a country imports more than it exports.

On the other hand, high interest rates cool the economy by decreasing available money mass, increase unemployment (always a hot potato for politicians with an eye on polls) and increase the cost for servicing debt.

It’s precisely the IMF’s job to provide low interest loans and break the vicious circle. However in the current political climate, it is unlikely to happen.

Foreign Exchange Reserves were fully depleted in a futile attempt to support the T. Lira. These reserves now rely solely on short term borrowing (aka Swaps). “As everyone tries to exit at the same time, it causes spikes in lira rates,” said Onur Ilgen, the head of treasury at MUFG Bank Turkey in Istanbul.

Renaissance Capital predicts the currency could slide a further 12% by year-end, while Commerzbank AG expects it to reach 10 per dollar.

Reference: Lira Plunge Squeezes Traders as Swap Rates Surge to 1,400%

More worryingly, CDS spiked too:

This value reveals a 7.45% implied probability of default, on a 40% recovery rate supposed. CDS value changed +47.19% during last week, +50.69% during last month, +7.73% during last year.

Will Turkey destroy its own economy?

Compared to other major “Emerging Markets”, that’s a lot better than Argentina (17.18%) but worse than South Africa (5.23%), Brazil (3.63%) or Mexico (1.80%).

Will Turkey Destroy Its Own Economy? Now that there is a political lightweight at the central bank’s helm, Erdogan believes that he will be able to get the central bank to do his bidding and to cut interest rates ahead of the next Turkish election.

“For an emerging market economy, it is generally not a good idea to engage in highly unorthodox economic policy even when global liquidity is plentiful. This makes the timing of Erdogan’s move all the more surprising. He is choosing to move at precisely the time that global liquidity conditions for the emerging market economies are tightening and are likely to continue tightening.

Indeed, as a result of the largest U.S. peacetime budget stimulus on record and growing inflation concerns, ten-year U.S. Treasury bond yields are now rising at a more rapid pace than they did during the 2013 Bernanke Taper Tantrum. For similar reasons, the dollar is beginning to strengthen. Those conditions are bound to put a sudden stop in the flow of capital to the emerging market economies in general and to Turkey in particular.

It is also not a good idea to wave a red flag at the markets by pursuing unorthodox policies at a time that one’s country is as vulnerable to speculative attack as is Turkey. Not only has the central bank depleted its international reserves in the past unsuccessful defence of the currency. Its corporations are saddled with a mountain of U.S. dollar-denominated debt and its all-important tourist industry is on its knees as a result of the ongoing coronavirus pandemic.

Warning to other emerging markets

Turkey’s economic vulnerabilities have not been lost on the markets. Turkish lira has lost more than 10 % in its value as investors have rushed to the door. The country’s stock and bond markets have been pummeled. Investors now fret about the direction of economic policy under an erratic and increasingly powerful president.

Having defiantly rolled the economic policy dice and totally undermined the central bank’s independence, it is doubtful that Erdogan will make a humiliating policy U-turn without a further intensification of the country’s currency crisis. The only good thing that might come out of the country’s economic troubles is that it might serve as a warning to other emerging market countries not to play with economic policy fire especially at a time of a less forgiving international financial market environment. “

In conclusion meeting targets looks fraught with danger, even for expert economists

This article is from Quora.

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