Turkey’s Unsustainable Economic Model May Be Sustained for Quite a While

After a difficult year, it may be tempting for investors to see 2023 as the point when Turkey either succumbs to its overwhelming financial vulnerabilities or is forced to clean house. But the reality is that neither may happen.

Turkey’s closely watched current account recorded a deficit of just $0.4 billion for October, according to official data released Monday—a sharp reduction from the $2.9 billion gap reported for the previous month. While the improvement is less substantial once adjusted for seasonal patterns, it does show how the lira’s 60% fall over the past two years has at least engineered a tourism boom that is now boosting exports and bringing in much-needed foreign currency.

Chiefly, though, the narrowing deficit is a result of falling commodity prices since June. A key weakness of the Turkish economy is its extreme reliance on buying energy abroad. On top of this, distressed Turks have taken to importing more gold, probably to insure themselves against inflation running above 80%.

This helps explain why, in a year characterized by a strong dollar and surging oil and metals prices, Turkey has been hit hard even by the standards of emerging markets—Vladimir Putin’s Russia notwithstanding. With global inflation now easing, however, it could be that 2023 lifts all boats, even Turkey’s.

Indeed, President

Recep Tayyip Erdogan

said Monday that he expects inflation to come down to 20% in 2023, after recently suggesting he will run for office for the last time next year. Although he is partly responsible for prices skyrocketing by pledging to keep interest rates low, it isn’t impossible that he gets his wish in time for the election: Turkey’s inflation has already stabilized in line with the global trend, the dollar has come off its peak and some developing nations are also likely to start cutting rates soon.

But what about Turkey’s underlying financial vulnerabilities, which triggered its 2018 currency crisis? Back then, international investors refused to roll over financing to Turkish banks, which had fueled a dollar-borrowing binge among local corporations. 

Most of the guilty parties have since reduced their non-lira liabilities. Corporations have brought dollar borrowing more in line with dollar revenue. Savers have flocked to depreciation-hedged deposit accounts that officials introduced a year ago. The government has replaced international creditors with domestic banks, which in turn have reduced their liabilities to the rest of world and increased their liquid dollar assets.

This has all been possible because the central bank has increased its net international reserves to a record $23 billion, and uses them to keep the system afloat. Lately, households have even started venturing out of their currency-hedged deposits, indicating that the lira’s stability over the past few months has restored confidence.

Fund managers rightly point out that this is a mirage. The central bank is ultimately borrowing all of these dollars from other countries: Swaps and forwards jumped to a record $69 billion in November. The credit binge has simply shifted its form as the Turkish president has secured currency-swap agreements with the governments of Qatar, United Arab Emirates, China and even South Korea. It is reportedly about to close an even better deal whereby Saudi Arabia would deposit $5 billion in Turkey’s central bank.

Investors shouldn’t make the mistake of thinking such arrangements can’t last just because they aren’t market-based: Even if Mr. Erdogan can’t keep this going forever, his geopolitical clout won’t be spent soon. If trade figures continue to improve, perhaps it will be enough for his controversial economic model to survive mostly unscathed.

With enough friends, even the unsustainable can be sustained. 

Write to Jon Sindreu at [email protected] 

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