The Opponent Who Refuses To Do What It Is Told

          Has Turkish President Tayyip Erdoğan finally met his match? Does he now have an opponent he cannot intimidate, he cannot fire, he cannot shut down, and he cannot throw in jail? So far, the dreaded opponent foreign currency , also known as the U.S. Dollar, is resisting all his usual tactics.

            He has resorted to the familiar yelling, stamping his feet, blaming foreign interests, and threatening dire revenge. Oh, he can rant and rave about the ‘tyranny of the dollar’, but this particular opponent pays no attention. Just this year the Lira has lost about 18% of its value against the dollar.  Over the last three months it is the worst performing currency in the world against the US Dollar. The standard remedy for this is to increase interest rates to make the Lira more attractive.

 

The 'enemy' that refuses to be intimidated

Not a pretty picture. Red line is the TL vs the USD since September 2016

But Erdoğan refuses to allow that. The Central Bank is nominally independent. The bankers may know better, but like every other bureaucrat in Turkey they are powerless to counter the president’s wishes. He believes that high interest rates limit economic growth. What he fails to appreciate is that a disappearing currency does more damage to the Turkish economy than higher interest rates could ever do.

How bad is situation getting? “We’ve totally lost it,” despaired one former senior official. “We have no monetary policy. Where’s the Central Bank? Where’s the Ministry of Finance? Ultimately, he’s going to have to raise interest rates to stabilize the currency. But I’m getting really tired of seeing the same movie over and over again.”

Exchange bureaux are the busiest places in Turkey these days

A leading economist put it even more bluntly. “We have a current account deficit and have to roll over $170 billion of short term debt every year. Our only strength is being globally integrated in trade and finance. Right now, we have reasonably smooth access to foreign capital. If he wants to destroy that . . .”

Any one over the age of 50 in Turkey can easily finish that sentence. All they have to do is recall the horrible decade of the 1970s. In addition to rising political violence there was a shortage of foreign currency which led, among other things, to frequent power cuts and lack of fuel oil for heating. People remember wearing overcoats in their offices because there was no heat. There was no electricity to run elevators. A friend was working in a school where they resorted to burning hazel nut shells for warmth.

            All that changed in the 1980s with a new currency regime that allowed easy access to much needed foreign currency allowing the Turkish economy to grow rapidly. That access is now under serious threat. And that threat has very serious consequences for the Turkish economy. Why? Because every facet of the economy – from manufacturing, retail, tourism, agriculture, to energy has become tied to the hated foreign currency.

            Turkey has a strong manufacturing base, but almost all the equipment in those factories is imported. Raw material for much of Turkish industrial and retail sectors is imported. One company, for example, makes fine woollen fabric, much of it for export. Where does the raw wool come from? Australia and New Zealand. Every drop of oil, every cubic meter of natural gas, every ounce of petrochemicals is imported. Turkish officials boast of the export numbers. But the vast majority of those exports contains goods, like the wool, that were first imported.

           In recent years, Turkish companies have borrowed billions in foreign currency to fuel their growth. Why foreign currency? Because in a world of zero interest rates it was cheaper than borrowing in Turkish Lira. That was a good plan . . . as long as the Turkish Lira remained stable. Now, however, these companies are faced with the massive problem of finding much more Turkish Lira to buy the foreign exchange with which to repay those loans.

            The president now resorts to ‘jaw-boning’, lecturing everyone to change their carefully hoarded foreign currency into Turkish Lira. The only problem is that every time he does that the value of the TL sinks even further. Then he says he is negotiating with Russia, Iran and China to change their trade with Turkey from foreign currency into local currency. Tough to see this working out well. Russia, for example, depends on exports of its massive natural resources – all priced in US dollars by the way -- to get vital foreign currency. The Turkish Lira does not qualify as a one of those vital foreign currencies. Even if Russia did agree to accept Turkish Lira, the value of those Lira would be tied to the US Dollar for every payment. So what would be gained?

Is he really going to accept TL for his precious natural gas?? Not too likely.

            He does have some ‘nuclear’ options that would certainly stop the Lira’s slide. But they would also stop everything else. About 50% of the deposit accounts in Turkey are in foreign currency. He could force conversion of those accounts into TL. Drastic and very, very painful for average Turkish citizens.

            He could also institute some sort of capital controls, limiting the movement of currency into and out of Turkey. Disastrous for Turkish companies who rely on free movement of currency to run their businesses. And what about those foreigners who invested hard currency in Turkey?  Can’t imagine them being very happy receiving bags of Turkish Lira when they sell out.

            Before inflicting ‘nuclear’ options on the long suffering Turkish public the president might want to share just where he and his ministers store their wealth. But no one should hold his breath for that bit of transparency.

            These steps are unlikely. But if the currency continues to weaken and his rants about ‘evil foreign manipulation’ and the ‘interest rate lobby’ fail to stem the tide there is, unfortunately, no telling what the president will resort to.