US economist warns Turkey of ‘balance of payments crisis’
An analysis of Turkey was written at the Council on Foreign Relations (CFR), a US-based think tank that specializes in foreign policy and international relations.
Brad W. Setser, a former Treasury official, assessed the risks to the Turkish economy in his article titled ‘The Rising Risks to Turkey’s Balance Sheet’.
Stating that Turkey’s official public debt is not very high, but the Central Bank has a large foreign exchange obligation, Setser said that this may lead to a balance of payments crisis depending on financing problems.
In the article, “Turkey’s financial situation has reached breaking point due to efforts to revive the economy and avoid a big drop in TL before the elections. “A return to post-election orthodoxy cannot magically regenerate the reserves spent in the last three months.”
Türkiye IS ABOUT TO CONSUME ITS RESERVES
The highlights of the article were:
* Turkey is about to actually deplete its usable foreign exchange reserves, and the country faces a choice between defaulting or implementing the IMF’s bitter prescription program through policy change.
* The problem Turkey finds itself in is different from a classic payments crisis. Türkiye does not have a huge official public debt. However, the Central Bank borrowed large amounts of foreign currency from banks and other governments. He then spent the foreign currency he received to defend the lira. The result could be worse in some ways than a standard financial crisis.
* Also, Turkey’s public finances are not as good as they seem. Because the banks depended on Protected Currency Deposits before the elections, and it cost the government $125 billion.
* Turkey’s financial crisis risk begins with its need for external financing. The increased amount of credit boosted imports and suppressed Turkey’s relatively strong export performance. The current account deficit, which fell well below $20 billion in 2021, is on track to approach $60 billion in 2023. There is no indication in the trade data that the gap will close on its own. . Import growth still exceeds export growth.
THERE IS A FOREIGN FUNDING PROBLEM
* A deficit, by definition, requires the ability to borrow abroad or the willingness to sell your current assets to cover the deficit. This is Türkiye’s second problem: the country cannot attract foreign financing.
* Foreign investors do not want to hold lira assets that carry the risk of depreciation while interest rates are kept artificially low. As a result, Turkey has been faced with a classic problem that several weak emerging markets have faced recently: an external deficit that exceeds the existing financing in the market.
* This brings us directly to Türkiye’s second problem. Reserves are running out. The 2023 external deficit, unlike the 2022 deficit, was largely financed by selling Turkey’s reserves.
* Turkey is known to currently have just under $50 billion in foreign exchange reserves and $50 billion in gold. However, not all of Turkey’s $48 billion in foreign currency is actually usable. About $19 billion of this reserve comes from swap agreements with Qatar and the United Arab Emirates. Thus, Turkey’s real foreign exchange reserves are currently approaching $30 billion.
* That’s not much of a reserve for an economy that was selling more than $5 billion a month and running a $60 billion current account deficit at the start of the year to keep its currency stable.
Türkiye CAN CONSUME YOUR RESERVES
* Depending on the pace of reserve sales over the next few weeks and the size of the recent flow of funding from the Gulf states, Turkey may run out of available reserves this summer.
* No doubt Erdogan is planning new deals with his neighbors to close Turkey’s financial gap. Erdogan managed to get funds from almost everyone. Even countries that don’t like each other paid Erdogan to keep Turkey from slipping into its rivals. For example, there is not a very close relationship between Qataris and Saudis. But both provided funds to Erdogan.
* At some point, however, the financial risks of lending to Erdogan’s unorthodox policy mix must outweigh the geostrategic costs of not financing Erdogan.
THE IMF LOOKS TO THE HORIZON
* The Central Bank, which receives most of Turkey’s geopolitical financing, currently has approximately $50 billion in foreign debt. The external debt of the Central Bank is actually much less than its internal debt. The total amount of foreign currency lent by the central bank at the national level is approximately 130 billion dollars. The total liability in dollars and euros of the Central Bank is approximately 150 billion dollars.
* Turkey’s low levels of public debt will not make up for its shortfall in liquid foreign reserves. But Erdogan’s recognition of the need to go to the IMF will help Turkey deal with its currency liquidity problems.