Turkish crisis in the spotlight – III

Date:28Aug2018

Here is another update or compilation of stuff that has been coming out on Turkey’s economic troubles these days — (for our previous installment, click here).

In a Bruegel post, S. Merler compiles several comments and views on the ‘Turkish crisis” (and more), some of which we have referenced in our two earlier posts.

Prof. Cochrane has a problem with Prof. Hanke’s suggestion (in the WSJ) that Mr. Erdogan should adopt a “currency board”, because he thinks, basically, Turkey has a fiscal problem that needs the fixing first. I think both professors are a bit off. True, private debt may de facto be seen as government debt (and problem may be ultimately fiscal), as Cochrane is saying, but at the moment, it is not fiscal: it’s about the country’s (especially the banking sector’s) high external funding needs, something a currency board cannot make disappear or magically fix. More generally, trying nominal fixes for real problems, which is ultimately what I think a currency board does, is the wrong prescription for Turkey’s current troubles… But none of this is all that relevant anyway, because it is unimaginable that Mr. Erdogan would fully give up “monetary policy independence” under a currency board, when he cannot even be talked into raising interest rates…

In another Project Syndicate blog, two prominent Turkish academics — Prof. T. Kuran and Prof. D. Rodrik — look at “the economic costs” of Mr. Erdogan. “Sooner or later, economic pressures will force Turkey to adopt fixes that will stabilize its currency and financial markets”, they say, but the problem that Turkey is faced with runs much deeper than what can be solved by short-term fixes, like hiking rates and/or adopting an IMF program, in their view. It’s all about politics and the system, they say…

In a Foreign Policy piece, former CBRT Governor D. Yilmaz (together with Selim Sazak) reminisce about the quality of former policy-makers and the policy-making in Turkey, compared to what is on offer now. True, the situation now is rather problematic, to say the least, and Mr. Yilmaz was a good Governor overall, coming from the older (reasonably-orthodox) tradition, but I am not so sure we should be so unequivocally praiseful of what was there before. After all, the erosion is not new; it began under the watch of the several senior names mentioned in the article…

On the more technical side of things, Brad Setser of the CFR does a podcast with Bruegel (which also includes Prof. Pisani-Ferry), following up on his CFR post we very briefly noted in our previous post, looking at, among other things, Turkey’s external funding numbers, while zerohedge.com draws attention to a blog by Mike Shedlock that singles out IIF’s Chief Economist Robin Brook, as the (only?) “lira bull”, based on the several tweets he sent out recently that point to lira’s undervaluation and the benign current account deficit path ahead… Not sure Mr. Brooks would fully agree with this observation — that he is a “lira bull” as such, but it’s quite clear that we have a tug of war of sorts at play here — between the ongoing current account adjustment on the one hand, and still-elevated F/X liquidity needs, on the other.  Depending on where the focus is placed, one can be a lira bull or a bear…

Incidentally, I just got this interesting IIF note in my inbox that details what 30% real depreciation (of recent years) means for Turkey, which I reproduce here in full:

“On one hand, steady Lira depreciation – even before the recent sharp decline – helped release pressure on the system, so the kind of contraction in activity that Argentina saw in 2002 is unlikely. On the other hand, we have shown in previous research that growth in Turkey is the most credit-dependent across all emerging markets. As a result, the sharp slowdown in credit flow that looks to be unfolding (Exhibit 5) – and the resulting negative credit impulse (Exhibit 6) – could cause activity in H2 to fall sharply, setting up 2019 for negative growth, the first contraction since 2009.”

“Negative growth in 2019”, very likely indeed, but it is the first time I hear it being voiced by an IFI… Tough times ahead…