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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