19 July, 2020

Quora Answer: What Does It Mean to Invest in Turkey Today?

The following is my answer to a Quora question: “What does it mean to invest in Turkey today?

At the moment, it means you either have a lot of faith in this Turkish experiment with a Neo-Ottoman nationalism, or you choose to ignore the current economic indicators.  The Turkish lira is pegged to the dollar.  At the end of 2018, the lira depreciated significantly due to the tightening US monetary policy as a result of trade tensions with China, high levels of foreign exchange debt in the private sector due to excessive borrowing, a rising current account deficit, and political tensions with the United States.  These political tensions lead to the US slapping tariffs on Turkish metallurgical exports.

As of now, the 2nd quarter of 2019, nothing has really changed.  The Turkish manufacturing sector imports material, and the weakness of the Turkish lira means that production costs have been raised, but the weakness of domestic demand means that this cannot be passed on to a substantial portion of their market.  This raises the price of goods and services at a time when purchasing power has dropped.  Real wages have dropped, and any increment is far below inflation.

Now, when we consider that Turkish businesses borrow a lot to fund production, this means that borrowing costs have also gone up in tandem with adverse currency exposure.  This means more companies either require debt restructuring or outright creditor protection.  This restricts further borrowing, and puts pressure on banks due to the rise in non-performing loans.

One simple way that Turkey may consider easing pressure on their economy would be to strengthen by current account by deferring payment for a quarter or two, issuing more sovereign bonds to bring some liquidity to the market, and cut back in areas that do not directly help economic growth.  They also need to aggressively find new markets.  Recep Tayyip Erdoğan’s administration has been spending recklessly on vanity projects.  So far, their measures have been extension of credit instalments for households and SMEs.  This is not enough.  This slower growth will widen their public deficit, but narrow their current account deficit, since this will severely impact tax receipts.  65% of the Turkish government’s fiscal revenue is from indirect taxes.  Slowing domestic demand has put severe pressure on their fiscal policy.

On the other hand, this weaker lira will make Turkish exports cheaper, were it not for the production costs of foreign inputs.  Another sector that will benefit is the tourism sector, but my concern is the perceived instability of Turkey.  The antics of the Turkish government also feeds negative perception.  Erdoğan courting the Islamist vote, which backfired in Ankara and Istanbul, will only embolden extremists, which does not help the tourism sector,

So, we have political instability to add to this equation of a slowing economy, a weakening lira, and rising external debt.  Erdoğan’s Justice and Development Party (AKP) was only able to secure 295 of 600 seats in Parliament.  It then formed a majority with the conservative nationalist MHP party.  The last thing they need is more Islamists in power, advocating a more conservative policy.

In summary, I see little reason to invest in Turkey in the current climate, and I see no signs that this is going to change anytime soon.  There has to be substantive change in fiscal policy coupled with an easing of debt as a percentage of GDP.  There has to be less pandering to nationalist Islamist rhetoric – that scares away investors.



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