Further strengthening the Turkish economy

Focusing on the dynamics behind price, exchange rate, CDS, current account (CA), interest rate volatilities; rising income inequality, huge interest payments and means to resolve these nominal volatilities.

The DS version:


Original text (with links):

Just to recapitulate an essential point here: Although the real economic outlook is not dire, indeed, nominal variables are rather challenging in Türkiye. More specifically, unemployment, growth rate, industrial production, export and even fiscal budget balances are usually positive.

Monetary and financial figures, on the other hand, are still noticeable poor issues to contemplate. Hence, the post-election policies had better focus on these weaknesses. And this would, of course, include inflation, exchange-rate, credit default swap (CDS), current-account (CA) deficit, interest rates and other nominal macro-financial figures.

Key weaknesses

Therefore, financial, monetary and nominal variables have recently been rather tedious in Türkiye. They are the key issues the country could excel more in. In particular the chronic CA deficit, inflation, exchange-rate volatility, financial stability (as in rising household debts, exchange-rate instability and the CA deficit) or the worrisome financial issues in general have been problematic.

On the other hand, the targets (as in low CA deficit, low interest rate and higher exports) are correct, in essence. President Erdoğan has indeed always had a very clear stance against high interest rates, for example. However, the problem was probably practice or inception. More specifically, institutions-wise implementation process was not that clear. The central bank and the Ministry of Finance (for instance) might not have been ready enough for the policies they implemented.

Although these vast financial volatilities are not a critical issue only in Türkiye, they are relatively higher at home. After all, inflation has also reached 40-year highs in the US, the UK and even Canada. It further reached 30-year highs in Europe and 28-year highs in Türkiye. Yet, it was at over 85% in Türkiye. Huge exchange-rate volatility stood at over 100%, especially in 2021.

Moreover, Türkiye has opted for growth and more employment, at the cost of higher inflation. It has preferred inflation to the recession. That is, despite the rising inflation, growth and rising employment were preferred. Expansionary monetary and fiscal policy, lower interest rates, liquidity and credit abundance were effectively used to increase investment, production, employment and higher demand to keep the economic activity afloat.

CA deficit (at above 50 billion USD) is mostly due to gold imports, energy needs of growing Türkiye, rising energy prices, and also the intermediate good-service imports of a growing economy. High CA deficit leaves Türkiye exposed to international price movements, the pass-through effect over the exchange rate movements. The CA deficit (and external finance needs) should thus be resolved and not left out as a structural issue.

The decreasing labor share of national income (down from 36,5% to 26,5%) in the past 6 years is another critical issue to bear in mind. A new course of price stability, growth, rising wages and social policies are required to solve this issue. Yet, it is still much better than the mid-1990s. The post 2001 period has been a gradual improvement era, except the past few years. Minimum wage hikes, especially in the past 1 year, are a good head start.

Huge interest payments, at over a few hundred billion TL (311 billion TL in 2022, and 566 billion TL expt. for 2023) are also worthy of notice. They are mostly due to global contractionary monetary, financial and credit crunch conjuncture. Rising domestic savings, liralization strategies and decreasing the external finance needs are therefore fateful.

That is indeed why Türkiye is rightly targeting domestic production, savings (including its exchange-rate protected accounts, gold accounts etc.), even higher reserves, and encouraging TL deposits and savings. However, for that to succeed, less price volatility, less uncertainty and reasonable real interest rates are needed. Creating new employment opportunities is also critical.

High inflation and rising living costs decreases purchasing power and the real economic value of income and savings. It further increases uncertainties, disproportionally affects the rich and the poor, and leads to falling real wages and improper pricing mechanisms.

Persistent high inflation

Türkiye has opted for growth and more employment, at the cost of higher inflation, especially in 2022. It has preferred inflation to the recession, as underlined earlier. But, the high and volatile inflation rate is a global phenomenon as well. And high global inflation figures also mean changing expectations regarding the prices in Türkiye and the direct impact on local prices over the trade relations.

External factors including the inflationary trends in the West should, thus, be taken into consideration. The sources and dynamics (fundamentals) of the inflationary trends are as crucial. International factors such as the pandemic related supply and demand imbalances, commodity price volatility, broken supply chains, chip shortage, slowdown in global growth engine (China), energy and food crisis have all surely led to this global inflationary trend.

A critical question at this point is if the inflation we face in Türkiye, nowadays, is a demand-driven or rather supply-driven inflation (due to the cost of production). Energy and food prices, other real shocks such as the broken supply chains and slowdown in China have all surely led to negative supply-side impacts. Therefore, more structural challenges (the same as that in imports and CA deficit dynamics) exist here.

Inflation (and exchange rate volatility) is hence mainly a global problem, to begin with. But why is it particularly awful in Türkiye? More specifically, all world economies faced the inflation problem, and the US dollar was rising against almost all currencies. However, these volatilities were much higher in Türkiye. Türkiye had additional internal dynamics.

In addition to all other post pandemic, supply-chain related issues, food and energy price surges, and even the unprecedented QE policies, Türkiye had its own issues. More specifically, in Türkiye, continuous cycles of higher inflation expectations (just as in the self-fulfilling prophecy), exchange rate volatilities, relatively huge demand (due to the young population, external demand and migration waves), but most essentially insufficient supply were all top-line issues.

Relatively strong demand is another significant issue, as supply is not fulfilling the needs of this excessive demand. Weak supply leads to domestic supply shortages. However, the Turkish inflation overall is more due to the former supply shocks or the cost related external factors such as energy prices, broken supply chains and food prices, as well as the exchange-rate movements. The same goes for the exchange-rate volatility as well, indeed.

Exchange-rate volatility

Most of the above-mentioned factors are true for external inflation, the exchange-rate volatility, as well. Of course, part of the reason was rising USD, against almost everything else (especially in 2022). But other internal factors should also be considered. For instance, policy-makers were not able to manage expectations, the negative perceptions or deal with the financial speculation or manipulations.

Global financial risk factors are, again, the first thing to take into account here. Monetary policy divergence across the globe (both between the emerging-markets and the developing-economies, and also amongst the developing-economies), strong US dollar (the dollar index was at its 20-year highs) were all major issues.

Meanwhile, pandemic related supply and demand imbalances, and the related external finance needs, energy and food price surges, the war in Ukraine have all altered the global risk perceptions. All these factors were affecting relatively more fragile economies (in terms of exposure to speculative attacks, manipulative actions, and financial shocks), and those that need external finances the most.

That being so, energy imports (CA deficits) are the main weakness or shortfall of the Turkish economy. But Türkiye has also focused on extensive gold imports and the rising intermediary good needs of growing Turkish economy. Other pitfalls included rising chip, other critical imports and the rising cost of these imports.

This trend of rising prices (of the post-pandemic era in particular), in general, has even turned into a self-fulfilling prophecy. But, unfortunately, part of it is also sometimes overshooting and undershooting. After all, financial markets are notorious for their overshooting and undershooting behavior in the face of unexpected negative information.

The political pressure, speculative and manipulative reports, internal notes or comments from local and leading international financial intermediaries have all caused a cyclical volatility. Part of the story is also (hence) cyclical, speculative, political process and direct external influence. The experiences Türkiye went through in 2018 are a good case study at this point.

CA deficit and external finance needs also lead to fragility. Uncertainties (policy-wise, political and financial) have been higher. Unconventional or unorthodox policies (implemented starting in late 2021) were not communicated very well. There was too much uncertainty and concern in the markets.

Election manifesto

The problem in Türkiye, overall, seems rather to be about communication, signals and the expectations management. Communication of the new heterodox policies was a critical issue. Most importantly management of these expectations has been a challenge. Hence, it should probably be more prioritized. CA deficit and external finance needs are another huge upward pressure here. The rising prices has even turned into a self-fulfilling prophecy.

Meanwhile, a more just and inclusive development should also be ensured. Industrial and structural transformation, energy and infrastructure investments, defense and manufacturing advances, chip production, national electric vehicle, housing sector initiatives, and falling commodity dependence are all helping Türkiye transform into a more stable economy. They will also help increase economic independence.

Decreasing external dependence, on the other hand, will help increase resilience to external shocks, as well. Meanwhile, the costs, so far (due to a new economy model and accruing costs of the unconventional stance), should also not be in vain. The policies so far should pay off from now on. Ak Party’s new term economic policy measures and the election manifesto also seems to be based upon the new model, better known as Türkiye Economy Model (TEM), and a vision to expand beyond the current trade and economic connections.

Accordingly, policymakers also aim to increase production, investment, employment and exports via lower interest-rates. With the help of these types of (mostly) supply-side policies, Türkiye aims to bring down (better, even topsy-turvy) the chronic CA deficit and decrease inflation to single digits again.


Türk Yolu Projesi

Millet İttifakı, 2022’de çıkan “Türkiye ve Yükselen Asya” kitabımı iyi okumuş görünüyor. Mutlu oldum. Asya’nın (ve de benzer potansiyeldeki uzak ülkelerin) ekonomik ve ticari potansiyeli değerlendirilmeyi bekliyor.

#OrtaKoridor #BRI #İpekYolu #Ticaret #UzakÜlkeler #Asya #Çin #Türkiye #TürkYolu #Kılıçdaroğlu #TürkYoluProjesi

Kitabın yeni ve daha kapsamlı edisyonu da yolda…

Türkiye ve Yükselen Asya -1: https://www.researchgate.net/publication/364930878_Turkiye_ve_Yukselen_Asya_Ekonomik_Is-birligi_Firsatlari_Trendler_ve_Riskler

Türkiye ve Yükselen Asya -2: https://www.academia.edu/89553968/T%C3%BCrkiye_ve_Y%C3%BCkselen_Asya_Ekonomik_%C4%B0%C5%9F_birli%C4%9Fi_F%C4%B1rsatlar%C4%B1_Trendler_ve_Riskler

Sabah-1: https://www.sabah.com.tr/yazarlar/perspektif/bilal-bagis/2022/02/05/asya-yuzyilinda-yeni-turkiye

Kriter-1: https://kriterdergi.com/ekonomi/yeni-ekonomi-modeli-ve-yukselen-asya-ile-ekonomik-iliskiler

Sabah-2: https://www.sabah.com.tr/yazarlar/perspektif/bilal-bagis/2022/09/10/cok-kutuplu-yeni-dunya

Sabah-3: https://www.sabah.com.tr/yazarlar/perspektif/bilal-bagis/2022/09/10/cok-kutuplu-yeni-dunya

Özetin İngilizcesi: …

Türkiye üzerinden, Orta Asya’ya, Çin ve Doğu Asya’ya uzanacak yeni bir ticaret yolu ve taşımacılık koridoru; yeni bir İpek Yolu, yeni bir Orta Koridor, Türkiye’nin kendi demiryolu ve kara taşımacılık yolu projesi hedeflenmelidir.

Türkiye, Orta-Asya’daki Türk dünyasının denize açılan kapısı olabilir. Nitekim, bugün, uluslararası ticaretin, bugün, %90’ı hala denizlerden yapılıyor.

Türkiye, Asya’yı, Çin’i, batıya ve Avrupa’ya bağlayan hayat kara ve demiryolu ulaşım, lojistik, taşımacılık ve transit geçiş merkezi rolünü üstelenebilir.

Hava ve deniz ticaret yollarına ek olarak, kara ve demiryolları,

Yeni bayram müjdesi ne olacak?

Yeni bayram müjdesi ne olacak?

Karadeniz gazı, bugün karaya çıkarılıyor. Mayıs’ta da evlere ulaşmış olacak.
Türkiye’de doğalgaz zaten ciddi bir sübvansiyon ile (maliyetin %80’i) ile son tüketiciye sunuluyor.

Ancak, Karadeniz’deki doğalgaz da evlere ulaşınca, 
• enerji faturaları yine düşer mi 
• ya da belli bir miktar doğalgazın ücretsiz sunulması düşünülür mü 
• veya ekonomiyi ve büyümeyi destekleyici geleneksel olmayan bir para politikası aracı helicopter money gibi doğrudan hesaplara para mı yatırılır? 

Yeni bayram müjdesi ne olacak sorusu cevap buldu:

  • 1 yıl boyunca evlerdeki mutfak ve sıcak su tüketimi için gereken doğal gaz (25 m3) ücretsiz olacak.
  • Ayrıca 1 ay boyunca konutlarda ısınma dâhil tüm doğal gaz tüketimi de ücretsiz olacak.

Lessons from the California-centered banking tremor

The critical question is: Could the collapse of a major bank such as Silicon Valley Bank trigger a widespread financial turmoil that has repercussions for the other emerging market economies as well?

DS version: https://www.dailysabah.com/opinion/op-ed/silicon-valley-bank-lessons-from-california-centered-banking-tremor

Original version of the SVB opinion 👇:


2022 will be remembered as the year of uncertainties due to a global tightening cycle and a major war in Ukraine. But on the other hand, the new banking quake in the United States and Europe also offers further warnings regarding the chronic problems and risks associated with the conventional financial system.

The post-pandemic high inflation, increased borrowing and monetary policy divergences have ushered further uncertainties. It is unclear whether 2023 may lead to additional uncertainties or if it will be no different. One thing is for sure, though, even banks in the West are not resilient to rate hikes, political uncertainties or accumulated financial risks.

There is, of course, no widespread banking or a global financial crisis like the one in 2008 today. At least no general liquidity or significant balance sheet problems, as in the Lehman era, are observed today. Banks are also in a relatively strong position compared to 2008. The post-2008 regulations are still largely effective and working.

However, the de-regulation process in 2018 and (especially) monetary expansion steps after the pandemic made the banking system even more susceptible. As a result, even the mighty U.S. banking system is showing signs of cracks nowadays. This time, in the 2023 banking crisis, though, at the center of the problem lies the financial risks accumulated to this day.

Although the tightening decisions and aggressive interest rate hikes by policymakers are right, in its essence, they have also created significant side effects (just like the rapidly decreasing interest rates in the Turkish Economic Model). Unfortunately, however, executives in the U.S. and Europe were not adequately prepared for this tapering tantrum.

At its core, the financial system faced a bank run challenge here. And this banking crisis happens when you don’t do your job right. Therefore, even a moral hazard concern related to bank mismanagement could be raised here. After all, the perception of the banking system in the West is already deteriorating.

When shadow banks, financial shorting and derivative holdings are considered together, the risks and potential losses of the banks are (indeed) much more substantial than are considered. The last year’s wave of interest rate hikes (aimed at fighting inflation) was the final nail in the coffin. Correction attempts didn’t work either, and a wave of bank runs followed.

Rate hikes continue

During the expansion wave in 2020, while banks such as Silicon Valley Bank (SVB) loaded up on long-term bonds, the U.S. Federal Reserve (Fed) did not even think of raising interest rates then. But then, they started increasing interest rates aggressively, beginning in March 2022. Hence, while interest rates rise to historic highs in the U.S., banks with growing losses are on the brink of the abyss.

Thus, today, there is a financial crisis mainly triggered by the Fed’s rate hikes that have been going on for more than a year. Because of that, new interest rate hikes will continue to pose unknown risks. As a matter of fact, by the end of 2023, the likelihood of a new recession is also getting stronger. Other banks, such as the Deutsche Bank, are also under pressure.

With this in mind, these types of potential unrest are not expected to eat away all banking systems, but mainly the weakest links on the periphery. This bodes well that common financial risks may not be too high. Still, despite no systematic banking shock or a crisis like that in 2008, banks face relatively high risks today.

On the other hand, the Fed’s rate hikes were also a warning factor that revealed beyond the tip of the iceberg. For example, in the U.S., unrealized losses (accumulated over time but not recognized yet) due to asset depreciation amount to $620 billion, according to the Federal Deposit Insurance Corporation (FDIC). According to some other accounts, these losses amount to somewhere between $1.5 trillion and $2 trillion. That is also part of the reason international organizations reiterate their warnings to member economies.

However, the future of this panic will most likely depend upon the steps taken by the regulators, the market perception and the policymakers’ signals. It will depend on the market’s liquidity conditions, the investor’s risk appetite, the search for returns, and how much more risk the bank managers are ready to bear with excess return concerns.

Lessons from the crisis

Frankly, these types of banking crises are voiced every now and then. And the reality is that a banking crisis was and should always be expected because modern conventional banks, by their very nature, are prone to go bankrupt. This is mainly because of the current fractional reserve system and especially the risks banks take when the regulations are loosened.

Moreover, technological advances have also exacerbated this worsening situation. New technologies have not changed conventional banking, but it has made them more vulnerable and fragile. For instance, mobile applications have made it much easier to withdraw money now, and the information flow is also much faster thanks to new-generation mass media platforms. That is why, the recent banking failure is sometimes also called “the first social-media-fueled bank run.”

Meanwhile, this is undoubtedly no 2008 Global Financial Crisis either. Banks are in a much stronger position today regarding their capital adequacy ratios, thanks to new regulations and laws of the post-2008.

Yet, although the apocalyptic impacts fears are not rational, there is still much to be concerned about. Financial asset prices (due to the ultra-loose monetary policy) were expected to lead to distress in the financial system anytime in the future. And it did happen, unfortunately.

One should also remember that in the 2023 banking turmoil, financial regulations (the de-regulations of 2018) and easy money-related issues (especially of the post-pandemic era) were at the heart of this turmoil. And hence came the relatively accelerated run on banks or the run on deposits.

Solvency issues due to the excessive long-term, low-rate bond holdings and the resulting hidden losses are a key story of this 2023 banking panic. No hedging against these rising risks (e.g., having insurance as in the interest rate swaps) in the U.S. banks’ case is also noteworthy.

That said, the so-called shadow banks, derivatives, and accumulated mark-to-market losses are each genuine threats. In addition, the type of new-generation banks that function as regular banks, but are not regulated at all, are a real financial threat. Finally, short-selling on stocks is another critical issue, and the short-sellers will likely win big-time.

Part of the story is also a moral hazard related to risk mismanagement and the top management’s involvement in supervising their own banks. They even played a leading role in repealing the Dodd-Frank Act of post-2008. Not to mention that this act, in particular, played a substantial direct role in the 2023 banking turmoil.

This is indeed a “deja vu,” considering the Gramm-Leach-Bliley Act of 1999 that repealed the Glass-Steagall Act and ended the regulations separating commercial and investment banks in the U.S. In that case, the authorities were letting the commercial banks in the U.S. make risky investments, which paved the way for the 2008 crisis.

What to expect looking forward?

So, is a new global financial crisis exacerbating? The fragility in the U.S. banking and monetary system are indeed containable with the proper policy measures. However, sometimes, these policy responses also lead themselves to anxiety and instability. In that sense, forward-looking expectations depend upon prospective regulations, signals, and the bank managers’ attitudes.

One could also wonder what this financial turmoil means for countries like Türkiye. However, for now, Türkiye does not yet have such risks. Türkiye, in particular, has a much more robust banking system thanks to the 2001 banking crisis and the subsequent regulations. That said, regulations, monetary policy decisions, and risk management risks should all be taken more seriously.

Yet another critical issue, at this point, is the concern or question of whether or could the recent banking turmoil have financial contagion toward the emerging markets as well. Could, for example, the economic crisis triggered by the collapse of a major bank in the U.S., such as SVB, also have repercussions for other emerging market economies?

The current banking turmoil in 2023 is reminiscent of the 1907 banking crisis, which led to the creation of the Fed system in 1913. However, regarding the policy responses, we should expect new measures such as full deposit insurance to be debated more often.

Furthermore, depositors should probably not be directed toward the “too big to fail institutions” either. Large, inefficient and too-big-to-fail financial institutions require much more extensive and costlier government or public institution interventions or bailouts during the financial panics.

Ekonomi ve siyaset birbirinden bağımsız düşünülemez

Ekonomi ve siyaset birbirinden bağımsız düşünülemez. Siyasi tercihler de doğrudan yeni ekonomik sonuçlar doğurur. Hepimizin hayatını, sofralarımızı, aile bütçemizi, geleceğe yönelik planlamaları da doğrudan etkiler.

İnsanlar da bu yüzden artık bilinçli. En küçük bir olumsuzluğa, yeni bilgi akışına dahi ani ve sert tepkiler artıyor. Twitter gibi sosyal medya paylaşımları ile birkaç yüz-milyar dolarlık bankalar saatler içinde battı. 2-3 hafta öncesini unutmayalım!

Şahsi kanaatim, Cumhurbaşkanlığı artık garanti. Hamleler doğru. Milletvekilliği seçimleri sonucu ise tamamen adaylara bağlı.

En azından bugün artık geçmiş dönemlerin yanlışlıkları tekrar etmemeli; toplumun sorunlarına cevap bulabilecek, katma değer yaratabilecek adaylara; reklam ve merkezdeki politik bağlantılar, rıza-minnet yerine liyakate dayanan tercihlere; bölge dengeleri, sosyal sermaye ve beşeri sermaye potansiyeline odaklanılmalıdır.

Aksi halde hezimet kaçınılmaz! Sadece seçimler değil, ülke yönetiminde de sonuç hezimet olur!

Ehliyet ve güven, bugün, geçmişte hiç olmadığı kadar önemlidir!

Ülkenin bugününü ve yarınını teslim edeceğimiz adayın ve adayların, donanımlı, ehliyetli ve birikimli olması; bugünkü sorunlu konjonktürde ülkeyi temsil için seçilecek kişinin karizması da bir o kadar önemlidir.

Özellikle de ülkenin içinden geçtiği bugünkü durumda, finansal sisteme yönelik tehditlerin dozajının artmaya başladığı bu yeni dönemde, yönetme ve proje üretme kapasitesi daha yüksek; birikim ve ehliyet sahibi adayların seçimi özel önem arz-eder.

Seçim sonrası ise, ….

6 Şubat 2023 Türkiye Depremleri

Tüm Türkiye’yi sarsan 6 Şubat Depremleri ile ilgili değerlendirmelerim, kendi gözlem ve paylaşımlarım…

Hatay’da Kurban: https://bilalbagis.wordpress.com/2023/03/25/hatayda-kurban-ramazan-2023/

Bağış, Bilal. (2023). 6 Şubat Depremleri ve Sosyal Sermaye, İktisat ve Toplum Dergisi 14 (151), 84-91. Link: https://iktisatvetoplum.com/6-subat-depremleri-ve-sosyal-sermaye-bilal-bagis-2/

Bilal Bağış, (2023). “How to Finance Post-Quake Reconstruction in Türkiye?”, Daily Sabah, 15 Mart 2023. Link: https://www.dailysabah.com/opinion/op-ed/how-to-finance-post-quake-reconstruction-in-turkiye

Bilal Bagis, (2023). “Turkey Earthquakes, Revivification, and Revitalization”, Politics Today, 25 Şubat 2023. Link: https://politicstoday.org/could-earthquakes-in-turkey-lead-to-revivification-and-revitalization/

Bilal Bağış, (2023). “Depremin Yeniden Aktive Ettiği Sosyal Sermaye”, Sabah, 18 Şubat 2023. Link: https://www.sabah.com.tr/yazarlar/perspektif/bilal-bagis/2023/02/18/depremin-yeniden-aktive-ettigi-sosyal-sermaye-1676704481

Interview on Asharq/Bloomberg, “Potential economic costs of the earthquake in Türkiye”, 12 Şubat 2023.

Deprem yardım kampanyası: https://bilalbagis.wordpress.com/2023/02/16/deprem-yardim-kampanyasi-a-massive-fundraising/

Depremzede bir aileye Ücretsiz Kiralık Daire: https://bilalbagis.wordpress.com/2023/02/11/depremzede-aileye-ucretsiz-kiralik-daire-0-tl/

Bağış cağrısı: https://bilalbagis.wordpress.com/2023/02/07/donate-bagis-yap/

Linkedin: https://www.linkedin.com/pulse/please-consider-donating-l%25C3%25BCtfen-ba%25C4%259F%25C4%25B1%25C5%259F-yap%25C4%25B1n-bilal-bagis-phd/?trackingId=xA0b7CnRQpSSFLNbSbejdQ%3D%3D

6 Şubat Depremleri: https://bilalbagis.wordpress.com/2023/02/06/turkiye-deprem-eearthquake/