You Can't Fool All The People All The Time

 

Turkish President Tayyip Erdoğan would do well to remember that he came to power more than 20 years ago on the back of a total economic collapse – complete with 1,000% interest rates, disappearing currency, and failing banks – generated by the sheer incompetence, corruption and economic illiteracy of the governing politicians at the time.  Technocrats in the Treasury and Central Bank at the time, in contrast, were extremely well educated and capable. They knew exactly what was happening but no one in power wanted to hear their warnings. After the political leaders had destroyed the economy these same technocrats designed a program to pull Turkey out of its economic and financial morass. The IMF adopted this program and the country enjoyed a few years of rational economic behaviour.

Unfortunately, as Erdoğan grew stronger he threw away these training wheels and thought he and his cronies could manage things themselves. As one very experienced analyst put it, ‘he replaced this high quality group with sycophants who know nothing and are proud of their ignorance.’

So far this year the Turkish Lira has lost more than 56% in value. Most analysts estimate real annual inflation is well over 30% and promises to climb higher. This brought back memories of the hyper-inflation and sky-high interest rates of the 1990s when I was managing money in Turkey.

Will the captain go down with the ship?

At least some senior bankers and a few politicians in the ‘bad old days’ knew the country’s financial situation with hyper-inflation and high interest rates was unsustainable – or so they said after a couple of drinks. But they were making so much money dealing in super-high-yielding short term government debt that they had no motivation to change anything. They all knew the music would end one day and hoped they were nimble enough to bail out before the inevitable crash. A few were that nimble. Most weren’t.

The major difference now is that instead of letting interest rates rise to counter currency weakness and dampen inflation Erdoğan has forced them lower in the bizarre belief that these lower rates will help reduce inflation instead of pouring gasoline on the fire. He points to Turkey’s relatively high growth rate as proof of his theory but forgets that even in the disastrous 1990s the country’s high growth rate didn’t stop the collapse. One observer likened the situation to building a sky-scraper on an extremely weak foundation. At the slightest tremor it will all come crashing down. Erdoğan fantasizes about copying the Chinese economic model, but, as one financial analyst put it, all he is doing is re-creating the Zimbabwe meltdown.

Erdoğan claims his policies will lead to Turkey’s economic independence and freedom from the pernicious influence of global economic and financial trends. A few brutal home truths strip the gloss off this rhetoric.

1.     With few natural resources Turkey is one of the least independent, most dependent, vulnerable economies in the world. The vast majority of its energy and industrial raw material and intermediate goods is imported. Once basically self-sufficient in food the country now has to import substantial amounts of basic food. Covering your eyes and ears to these global realities isn’t going to change the situation.

2.     The much vaunted export boom is made up largely of imported parts merely assembled and re-packaged in Turkey. The Turkish value-added in these exports is somewhere around 10%.

3.     The Treasury, banks, and most companies rely heavily on massive hard currency inflows to stay afloat. Any effort to curtail these flows for the sake of so-called ‘independence’ would be catastrophic.

On top of this the Central Bank is nearly broke and would have trouble coming up with money for a decent cup of coffee let alone serious support for the ailing state banks. The Central Bank is also wasting billions of scarce US dollars by selling them in hopes of stopping the erosion of the Turkish Lira. It’s not working. One of the geniuses in the ruling party even called for Turkish businessmen to become the new national martyrs in gaining the country’s economic ‘independence’ by defending the lira by dumping all foreign currency. Not surprisingly this call to self-sacrifice was unheeded.

Life is getting very expensive for her

One can understand Erdoğan’s frustration. His poll numbers are dropping fast and none of the old strategies to rally his supporters seems to work. The days of vast, expensive infrastructure programs are over. In fact it’s worse than that. Some economists and bankers put the country’s hidden liabilities related to some of these projects at more than $40 billion. The government guaranteed foreign currency loans used by favoured contractors but these are never seen on national accounts because they are buried deep in the budgets of various ministries.

So there’s not much left to hand out to his circle of crony contractors. Erdoğan recently approved a large increase in the minimum wage. But with inflation roaring ahead this won’t bring much relief to the struggling workers.

Erdoğan has very few cards left to play and maybe he thought this last, desperate throw of the dice would re-create some of the magic that has kept him in power for so long.  But all it’s proving is that you can’t fool all the people all the time. He is desperately trying to distract attention from the economic collapse with foreign policy manoeuvres like opening talks with Armenia or aggressive behaviour in the Eastern Mediterranean. Recent polls, however, show clearly that the public is not distracted at all and focuses mainly on the deteriorating economic realities of  daily life.

Elections aren’t scheduled until 2023, but an economic collapse could bring them forward. If, by some chance, Erdoğan loses then the more interesting question is what type of government will follow him. I desperately hope it is more than a re-creation of the failed pre-Erdoğan governments. The Turkish people deserve something new, something that reflects the rapidly changing world rather than re-hash the stale old models.