Turkey, a nation of more than 80 million people, has traditionally been considered
one of the most open and advanced Muslim democracies in the world;
For years it was also one of the great economic promises.
Between 1999 and 2019 its economy grew in real terms at an average of almost 5% per year.
An expansion that the government supported with a huge modernization plan to update roads,
airports, ports and all kinds of infrastructure.
And so, VisualPolitik community, Turkey became a middle-income country and an investment magnet:
The economy industrialized, the country positioned itself as a fashionable tourist destination and
Istanbul became an important financial hub. The Ottoman economy was positioned as a gateway,
one of the most common connection points for accessing the markets of Russia,
the Middle East and Central Asia. What’s more, the country was a
respected member of the international community: It was – and is – a member of NATO and the OECD,
and since 1995 it has also had a customs agreement with the European Union itself,
which gives it preferential access to the huge European common market.
So, with all of this in mind, it can't be surprising that in 2018
we would find news reports like this: (11 October 2018: Turkey: the great "success
story" of the international economy. CaixaBank) Since then, however, things have changed a lot.
The economic boom that lifted millions of people
into the middle class for two decades has begun to falter.
And it seems that, today, the Turkish economy is facing a very severe currency crisis.
In 2021 alone, the Turkish lira has lost 50% of its value against the dollar.
This is a nightmare that threatens all the progress
made by the Ottoman economy in recent decades. And that has made us on VisualPolitik along with
our friends at Value School, ask ourselves a question: What has caused such a debacle?
And take note, because this is not the typical case of a government forcing its
central bank to create a lot of new money to finance its level of public spending.
In the case of Turkey, we are dealing with an entire political and economic strategy.
A totally deliberate plan. So what exactly is happening
with the Turkish economy? Well... Let's take a look.
(THE MONETARY DEBACLE) Throughout 2021, the Turkish
lira has lost 50% of its value against the dollar. And this is not an isolated case.
Since Recep Tayyip Erdoğan assumed the presidency of Turkey in 2014,
the Lira has depreciated by almost 90%.
A situation that, obviously, is having consequences. We can highlight three main ones:
The first is that inflation has skyrocketed. For example,
official figures point to an inflation rate of around 20%,
but private estimates indicate that it could have already exceeded levels of 60%. Take a look.
This has meant that many families have had to cut
back on basic goods such as meat or even bread. At the same time,
they are also having problems getting hold of imported products, such as medicines.
Secondly, Turkish savers are trying to exchange the lira they earn as fast as
they can for dollars and gold. This is causing significant damage to the local financial system.
On the one hand, this process accelerates the depreciation of the lira and on the other hand,
when it comes to cash withdrawals, it contributes to consuming the country's
foreign currency reserves. Something that, in itself,
may end up causing the government to establish tough capital controls.
And thirdly, the collapse of the Lira has led to a huge flight of foreign capital,
so that, for example, holdings of bonds and shares in the hands of
foreign investors have plummeted by more than 70% in recent years. Take a look.
And it doesn’t end there. In an attempt to support the Lira, the Turkish Central Bank
has intervened several times in the market by selling foreign currencies,
which has depleted the country's net reserves. In other words, the Turkish economy is facing
very, very serious problems. And take note, because there
are more than a few investors, analysts and economists who expect things to get even worse.
So then, what on earth is happening with the Turkish
economy? Listen up.
(A MATTER OF FAITH) I repeat the question:
What is happening with the Turkish economy? Well... Look at this graph.
Is there anything that catches your attention, anything that
strikes you as surprisingly strange? That's right! Even though inflation
is skyrocketing and the Lira is plummeting, Turkey's central bank is lowering interest rates.
In fact, the plan seems to be to cut them even
further. Which is exactly the opposite of what is usually done in these situations.
Because in order to curb inflation,
prevent capital flight and prevent the dollar getting stronger – which for example
makes foreign currency debts harder to repay – central banks usually raise interest rates.
But... Turkey is doing exactly the opposite. The question is, why?
Well, this all comes down to a type of economic policy that is already known as
"Erdoganomics". This is the key factor that
explains the tremendous crisis that the Turkish Lira is going through.
You see, Turkey's all-powerful president is convinced that if the central bank
lowers the country's interest rates, this will eventually lead to lower levels of inflation.
From his perspective, the "process" would be as follows:
lower interest rates encourage investment, investment increases production, which in
turn makes products cheaper, boosts exports and makes the country richer.
In short, we could say that for Erdogan, lowering interest rates is
tantamount to subsidizing investment. Never mind what happens to supplies,
raw materials, foreign investment or the purchasing power of Turkey's own savers.
("What we call exchange rates rise today and fall
tomorrow. What we call inflation rises today and falls tomorrow. Production
and employment are permanent.” - Recep Tayyip Erdoğan, President of Turkey)
And that is exactly why this president has been pushing the Turkish Central Bank
to lower interest rates for his entire term in office, and particularly during 2021. In fact,
the president's ultimate goal is to eventually set interest rates at zero.
And, take note, because Erdogan has already dismissed
five Central Bank top officials for not agreeing to follow this plan.
("He doesn't understand the economy, and the people around him don't understand
the economy [...] He is on another planet, in another universe". - Ahmet Davutoglu,
former Prime Minister of Turkey and former ally of Recep Tayyip Erdoğan)
So then, what's wrong with Erdogan? Where does he get the idea that the cheaper the
interest rate the better? Why does he think that the best way to deal with an
inflationary scenario and the collapse of the lira is to lower interest rates even further?
Well... All this more or less has to do with an ideological line of economic action that emerged
at the end of the 20th century and is known as "Islamic economics". A theory that regards
interest rates as the mother of all evils. Listen up.
(ISLAMIC ECONOMY)
The first thing we need to know is that the Koran strongly condemns
Riba, or lending money for profit. And that is why the Sharia, Islamic law, considers
that money is a simple instrument of exchange and, as such, cannot be used to make a profit.
So fixing a predetermined and fixed rate of interest could be contrary to Islamic law.
Now, although the Koran condemns usury, it does not clearly define it,
so historically many Islamic jurists distinguished between "excessively exploitative" money lending
and those with reasonable interest rates. This allowed, for example, the operation of
"monetary foundations" in the Ottoman Empire itself,
which offered credit with interest rates, and later of real banks all over the Muslim world.
However, everything started to get complicated in the second half of the
20th century when the theory of Islamic economics emerged, which besides being
influenced by Marxist ideas, returned to an extreme interpretation of the Riba, of usury.
In other words, it condemns interest rates.
And remember this is not just a question of, shall we say, morality. This same economic theory
argues that interest rates end up causing more inflation, more poverty and less economic growth.
And do you know what? Erdogan is a self-confessed follower of Islamic economics. In fact,
he has publicly defended his war on interest rates by making statements like this:
("There is a nass – a Koranic decree – on this issue; so is it up to you or
me?” - Recep Tayyip Erdoğan, President of Turkey) In other words, he has defended his political
program as a religious obligation that no good Muslim should question.
This is the great challenge facing Turkey that is causing so many problems.
A president who has taken control of every major institution in the country,
including the central bank, the universities and the vast majority of the media.
A president who is committed to a type of economic policy, the results of which are getting worse
and worse. And a president who does not seem willing to change his hand.
Without going back to far, at the beginning of December 2021, this news came out:
(Turkey's finance minister resigns amid the plunge in lira.
Lutfi Elvan resigns and is replaced by Nureddin Nebati, an Erdogan loyalist. Lutfi Elvan,
who was seen as the last voice of economic orthodoxy in the Turkish leader's cabinet,
asked to be relieved of his duties. – FT) And to further increase uncertainty and
perhaps country risk, check out the Turkish leader's next resolution:
(Erdogan announces the drafting of a new constitution in Turkey in 2022. EP)
In light of what we've seen, it doesn't seem that much can be expected.
And there you have it, VisualPolitik viewers, this is exactly what explains the crisis in Turkey.
Of course, not everyone is so pessimistic and there are those who point out that if
things stabilize and there is possibly even a change of government in the next elections,
things could improve very quickly. Take, for example, the case of BBVA:
(15 November 2021: BBVA launches a takeover bid for half of the Turkish
bank Garanti that it does not control for 2.249 billion euros – Cinco Días)
But now the question is over to you: Will Turkey manage to escape from this
difficult situation? Does it seem like a good time to invest in Turkey or do you
consider the country risk to be too great? Leave us your answers below. And you know,
if you found this video interesting, don't forget to like and subscribe to VisualPolitik.
Many thanks to our friends at Value School for their collaboration in making this video.