Since the dismissal of Murat Çetinkaya, Governor of Turkey’s Central Bank, in the beginning of July, 2019, there has been robust debate on the issue of Turkey’s interest rates. There was a clear difference of opinion between the government and the former central bank governor on the appropriate level of interest rate. In an attempt to support Turkish Lira, Çetinkaya gradually increased the central bank’s benchmark interest rate, in total 11.25 percent, last year fixing it to 24 percent. He was criticized on several occasions by President Erdogan for keeping the interest rates high. 

After the appointment of the new governor Murat Uysal, the previous deputy to Çetinkaya, many expected a rate cut. Uysal gave the first signal in that direction in his interview with Anadolu Agency on July 15.

Uysal’s decision for a rate cut came this Thursday when the central bank announced a drop in interest rates from 24 percent to 19.75 percent. For some analysts, the rate cut went beyond expectations. Thus, The New Turkey asked two experts of Medipol University, Prof. Nurullah Gür and Prof. Mevlüt Tatlıyer for their opinions on the recent rate cut decision.

Prof. Gür told The New Turkey that “most analysts had expected a 250 basis points cut on average. But there were also some market players who expected that the central bank might reduce its policy interest rate by up to 400 basis points. Therefore, although the central bank reduced one-week repo rate more than market expectations, it did not cause a shock effect.”

Prof. Gür further commented that “after examining the bank’s statement regarding its monetary policy change, it can be said that three factors come to the fore as the cause of the aggressive interest rate decrease. First, the downward trend in inflation has become more pronounced as unprocessed food and energy prices declined, and thus the central bank expects that ‘inflation is likely to materialize slightly below the projections of the April Inflation Report by the end of the year.’ Second, the global economic environment provided the central bank more space for an aggressive rate cut. As global economic activity weakens, all major central banks including the Fed and the ECB, are signaling a loose monetary policy. Third, some macroeconomic data on Turkish economy indicate ‘a moderate recovery in the economic activity’. This moderate recovery is fueled by export and tourism revenues. Domestic demand is still weak. So, the central bank expects that this type of a recovery will not trigger inflation.”

Prof. Tatlıyer told the The New Turkey that “to the astonishment of many, the central bank slashed the policy interest rate by 425 points to 19.75 percent in the July meeting. This is the biggest interest-rate cut since 2002, when it adopted an inflation targeting regime. However, this is also a very late move, since the central bank did not decrease the policy interest rate even once as the inflation rate gradually decreased to as low as 15.7 percent as of June 2019 from its peak of 25.2 in October 2018. The Turkish ex-ante real interest rate, thereby, increased gradually from 2.4 to 5.4 percent between November 2018 and May 2019 with an average of 4.3 percent.  In June 2019, it skyrocketed to an astonishing 8.1 percent. Before June, Turkey already ranked first in the world in terms of ex-ante real interest rates. So, a dramatic rate cut was imminent this month. With the latest move of the central bank, the ex-ante real interest rate happened to decrease less than 150 percentage points from 5.4 to 4.0 percent between May and June 2019. So, that Turkish Lira gained value against the US dollar after the record-breaking rate cut is not surprising at all.”

Russian leader Vladimir Putin’s remark “liberalism has become obsolete” was headlined in the Financial Times issue dated 27 June, 2019.

The liberalism meant by Putin is the administrative system based on “liberal values” that are defined by the American left and called “constitutional liberal democracy” by the West.

From the perspective of these values, Putin is often accused of a series of things, such as being “authoritarian,” ruling his country with an iron fist, silencing the opposition and condoning the killing of dissident names.

Until recently, it was a common belief that a country could not have an advanced capitalist system that would render it a big player in the global arena without having a democracy based on liberal values.

However, Russia, a country rich in energy resources and not liberal by any means, has been taking on crucial roles in the world scene. In addition, China is ruled by the Communist Party and has lately granted almost lifelong leadership to its new leader Xi Jinping. Despite its gigantic police state and its order that can send millions to concentration camps at the same time and can close big regions at the scale of countries to the world, China has the most rapidly advancing capitalist economy of the past 40 years and its critical position in the world order is obvious.

Turkey and liberal politics

Is Putin right? Has liberalism really gone beyond its purpose and become obsolete? These questions are discussed everywhere in the world nowadays, including Turkey, of course. In Turkey’s case, President Recep Tayyip Erdogan has been accused of being “authoritarian” and suspending democracy especially as of 2013. And lately, the EU has accused Turkey of going backwards in terms of the rule of law and human rights.

 Has liberalism really gone beyond its purpose and become obsolete? These questions are discussed everywhere in the world nowadays, including Turkey, of course.

The Western media often depicts President Erdogan as “the sultan of Turkey” with a typical orientalist gaze. This is a groundless insolence, because Erdogan’s power is based on popular support. It would be an insult to the Turkish nation if we compare the democracy in Turkey with countries like Russia, Azerbaijan or Kazakhstan. Turkey has always had a very vocal opposition. Turkey’s founding leader Kemal Ataturk had a strong opposition at the time, and Erdogan has a strong opposition today. Besides, the opposition in Turkey is on the rise in the current context.

Although the People’s Alliance, composed of the ruling Justice and Development Party (AK Party) and the Nationalist Movement Party (MHP), has preserved its power by enjoying more than 52 percent of the vote share in the latest local election, the opposition led by the Republican People’s Party (CHP) caught an advantage in terms of morale, since it won critical metropolitan municipalities such as Istanbul and Ankara. The repeat of the Istanbul mayoral election and the victory of the CHP’s Istanbul candidate Ekrem Imamoglu by 54 percent in the re-election amped up the morale of the opposition and caused opponents to see Imamoglu as a strong candidate to run for presidency against Erdogan in the 2023 presidential election.

On June 23, Turkey reached the end of an array of elections and referendums that began in March 2014. We have gone through two local elections, three general elections, two presidential elections and one referendum over the course of the past five years. The latest June 23 election should also be recognized as a separate election. So, the Turkish electorate went to the polls for nine times within this period. And now, the closest election is scheduled to be held on May 2023, at least on paper.

Depicting Erdogan as “the Sultan of Turkey” is typically orientalist. President Erdogan’s power is based on popular support and Turkey has always had a very vocal opposition.

Turkey has been in a great turbulence since the Gezi Park incidents in May 2013. The Gezi Park incidents, which caused a serious political and societal damage, were followed by the December 17 and 25 investigations, a purge attempt by the members of Gulenist Terror Group (FETO), the coup attempt on 15 July, 2016, orchestrated by FETO and the state of emergency declared after the coup attempt.

Throughout this period, the AK Party government turned to polls for the legitimization of the fight against FETO, asked for the people’s approval, and resorted to several extraordinary legal measures as of December 2013.

These measures that were taken as part of the anti-FETO fight form the basis of the criticisms directed to Turkey in terms of going backwards in democracy, human rights and the rule of law.  

The AK Party government and President Erdogan revoked a part of the extraordinary measures on the grounds that they are no longer needed, but Turkey could still not return to its pre-2013 “normal” state. In early 2013, Turkey was seeking to become more liberal and had started announcing judicial reform packages. After several liberating reforms made in 2013, the country entered a long period of stagnation, which is still ongoing.

The judicial reform initiative announced before the June 23 election is the most crucial indicator of the fact that the ruling power in Turkey still wishes to turn back to the pre-2013 route.

Will the liberal order, claimed to be dead by Putin, resuscitate in Turkey in the following months or years?

Will the liberal order, claimed to be dead by Putin, resuscitate in Turkey in the following months or years? Does President Erdogan and his administration wish that new liberties and reforms would determine the agenda of the country in the run up to the 2023 elections? 

Turkey’s economic challenge 

Before scrutinizing this, the economic recession Turkey has been confronting is also worth a brief mention. Turkey is currently facing the economic consequences of the political turbulence ongoing since 2013.

In fact, the economic recession began in 2013, when Turkey entered this political turbulence. The country firstly experienced a slow growth rate, which turned into recession over time. It would not be wrong to suggest that since 2013, Turkish people have been growing poorer whereas their income and wealth levels are on a gradual decline as the Turkish Lira’s value against the U.S. dollar is considered.

There is a correlation between the political turbulence experienced with this recession and the extraordinary legal measures taken.

The Turkish economy has a serious structural weakness. It always needs foreign capital for economic growth. There is no problem as long as this capital comes as direct investment, but not all of what is needed comes as direct investment. Turkey takes loans from abroad to a serious extent. This high level of financial indebtedness makes economic actors very sensitive to the changes in the value of the Turkish Lira while increasing the volatility of the currency. This is unavoidable when the earnings are Turkish Lira-denominated but the debts are in foreign currency.

Even worse, it does not seem very possible to overcome this economic weakness in the short term. Therefore, all the administrations in Turkey need the inflow of foreign sources in order to improve the welfare of the Turkish people. They naturally want to meet this need by drawing direct foreign investment capital instead of taking loans, but as I mentioned above, direct investment does not always satisfy all the needs.

The economic conditions and the no-election period that will last until May 2023 oblige the government to turn back to the pre-2013 Turkey.

The sharp devaluation in the Turkish Lira as of early 2018 alarmed the Western banks lending to Turkey. Turkey can no longer find additional loans. According to the latest figures, Turkish companies have paid debts corresponding to more than $25 billion over the past 12 months, and still cannot find new loans to take.

So, the economic conditions and the no-election period that will last until May 2023 oblige the government to turn back to the pre-2013 Turkey. Adopting policies that will prioritize economic development and promote peace and stability, the rule of law and other liberal values and practices seem unavoidable.

Furthermore, we have seen in the past 5-6 years that Turkish foreign policy directly affects the economy and the welfare of citizens. Turkey’s foreign policy steps always seek to guarantee its own national survival and the peace of its neighborhood in a tough region of the world. In the following period, the government should concentrate on the policy of having fewer foes and more friends.

I think it would be too assertive to refer to them as a “return to liberal policies,” because what Turkey seeks in the first place is “normalization.” Only after the normalization process is completed economic growth is enabled, it will be possible to speak about liberalization.

Amid growing fears regarding the slow-down of the global economy, the currencies of emerging markets lost their value against the U.S. dollar last Friday. However, the Turkish Lira (TL) was an outlier on that regard such that while other currencies lost their values by between 1 to 3 percent, TL lost its value by around 6 percent.

It was due to half-baked and misleading comments of some financial firms, -most notably- including the fear-stoking and rather manipulative internal note sent to clients by JP Morgan Chase. According to this note, there is a large discrepancy between the external debt repayments of Turkey and the fall in the foreign exchange reserve of the Turkish Central Bank in the first two weeks of March 2019. That is, while the Turkish Central Bank’s net reserves fell 6.3 billion dollars in this period, only 1.5 billion of this figure could be attributed to the Treasury’s Eurobond redemption. According to JP Morgan, the rest should have gone to trying to support the TL against the U.S. dollar before the local elections in Turkey, a situation which is unsustainable and will result in considerable devaluation of the TL after the local elections.

This reading of Turkey by JP Morgan Chase and some others is highly problematic on at least two grounds. Firstly, according to a Turkish Central Bank official, the Treasury’s external debt repayments and foreign-exchange sales to Turkish energy companies upon their request in this period amounts to 5.3 billion dollars. So, most of the alleged discrepancy is not a discrepancy at all.

Secondly, even though the Turkish Central bank had made foreign-exchange interventions, mere 3-4 billion dollars should not have sufficed to arrest the otherwise falling of the TL. To be clearer, JP Morgan assumes implicitly that as little as 3-4 billion dollars is enough to stabilize the USD/TL exchange rate when there is a considerable market force working against the  TL – such that after the local elections the exchange rate will rise considerably. As the world residents, we all know that this is not possible. And we can easily say that the very same financial firm would posit that such a tiny amount could not suffice to protect an emerging market currency against the U.S. dollar, if the Turkish Central Bank announced that it would make a foreign-exchange intervention amounting to 3-4 billion dollars.

After JP Morgan and some others implied that the USD/TL exchange rate was not stable on its own, but with only “implicit” governmental intervention, financial markets reacted fiercely. However, the next two trading days, the Turkish Lira rebounded by more than 6 percent. Financial markets are notorious with their so-called overshooting in the face of unexpectedly negative information. Because of this, if they had bought the story of JP Morgan and some others, then we should have seen a further and maybe more intense devaluation of the TL on the next two trading days, Monday and Tuesday, compared to Friday, in line with the “expectations” of them. However, what happened on Monday and Tuesday showed that financial markets did not buy the misleading story of JP Morgan and some others: TL more than recouped the losses of Friday.

If the very financial firms, who are to impart valuable information regarding national countries to their clients and the world at large, are telling incredibly misleading stories and abusing their limited power, then it means that something is terribly wrong with these institutions. They should be reminded that manipulating or misleading is not their job.

Turkey has left behind one of the most serious speculative attacks faced in its economic history. After the announcement of the New Economic Program, the Central Bank’s aggressive interest rate hike and the partial softening of relations with the U.S., the volatility wave in exchange rates slacked. These developments do not mean that all economic problems have disappeared.

Turkey’s economic management team has been putting its full effort to reduce the inflation rate to single digits, bring the current account deficit under control in a sustainable way, and prevent private companies’ high indebtedness from causing more serious problems. While looking for solutions to these problems, the economy should not be allowed to overcool. The recipe for achieving this is to complete ongoing promising investments and to make new ones.

Frankly speaking, it would be unrealistic to expect domestic companies to increase their investments. Interest rates are too high. Besides, due to shockwaves caused by speculative attacks, domestic entrepreneurs are in a perturbed mode. Therefore, attracting foreign capital and investments is essential.

The sharp depreciation of the Turkish Lira (TL) has made the value of Turkish assets cheaper, creating profitable investment opportunities for foreign capital. It is not difficult to guess that individuals and businesspeople that make investments in Turkey at such an appropriate time will get high returns in the medium and long run.

President Recep Tayyip Erdogan met with senior representatives of Turkey-based U.S firms last month. Treasury and Finance Minister Berat Albayrak held teleconferences, which attracted high interest from investors all around the world. To expand trade and investment ties between Germany and Turkey, the German Economy and Energy Minister Peter Altmaier along with CEOs of several major German companies visited Turkey last week. All these initiatives are crucial to explain and show that the negative effects of exchange rate volatility will be limited and short-term, and Turkey offers reliable long-term investment opportunities.

The value of many companies in the stock market (Borsa İstanbul) have been underpriced since February.  As the volatility of the exchange rate and the level of uncertainties regarding economic policies decrease, foreign investors will begin to buy more shares, paving the way for a new bull market. Since the banking sector dominates Borsa İstanbul, policies on debt restructuring and capital injection will be decisive for the course of the stock market.

Attracting foreign direct investment (FDI) is a reliable option for galvanizing economy activity; but, no matter how much foreign exchange it needs in this economic turbulence, Turkey should no longer give support to FDIs of all kinds. Turkey should be selective in this regard, giving incentives to FDIs that have potential on transferring new technologies, creating jobs and reducing trade deficit. FDIs to the manufacturing industry should be prioritized.

Some mid-sized foreign investors have been seeking to establish partnerships with Turkish companies of similar size operating in promising industries in Turkey. Related ministries and state institutions should establish platforms to bring together Turkish companies and foreign investors.

Housing, office and land prices in dollar and euro prices have become quite cheap after the depreciation of the TL. The government should make special sales campaigns to the expats living in Europe. The unpleasant results experienced in some projects of the private sector in the past years might have caused trust problems in the eyes of expats. Therefore, a government guarantee mechanism must be in place to establish trust in the sales campaign and thus reaping the full benefits of it.

As a part of initiatives to promote foreign investments, Turkey has recently reduced required limits for foreigners to acquire Turkish citizenship. Since Turkey provides a better business environment compared with MENA countries, this will encourage businesspeople from this region to make investment in Turkey. This is also a good opportunity for foreigners who plan to own a real estate in Turkey.

The global liquidity squeeze has been posing a major obstacle to Turkey on attracting high amount of foreign investment, as it deserves. But, compared to the last couple of years, Turkey will host more foreign investment in the next two to three-year period. Considering its industry base, human capital, infrastructure and geographic advantages, Turkey is a fertile destination for investors seeking high long-run returns.

The financial turmoil precipitated by the rapid devaluation of the Turkish Lira against the U.S. dollar, and the ensuing (negative) economic ramifications since then have caused many to offer possible steps to be taken as ways out of the economic troubles now Turkey has been going through. In this respect, a recurrent suggestion has revolved around “more saving” and “less consumption.” Indeed, saving is a merit on its own and evokes giving up short-term wants and desires to reach long-term goals.

However, since the modern economic/financial system we live in is mind-bogglingly complex with numerous variables and very significant feedback mechanisms, it is critically important to take into account and ponder the possible economic consequences and ramifications of the economic steps taken. This situation holds particularly for saving, a “macro” variable resulting from general workings of the economy.

When considering saving subject, one should pay attention particularly to two things: feedback mechanisms and the relationship between saving and investment. Firstly, one should not forget that in modern economies people produce mainly not for personal consumption, but to sell the products in the “market.” So, more saving and less consumption of one person (buyer/consumer) translates into less products sold and less income earned for another person (producer/seller). So, trying to save more and consume less altogether on the part of consumers in a market economy have to result in slack demand, higher unemployment rate and (possibly) an economic recession.

This situation could easily and ironically result in “less” saving instead of more at the end of the day. This is the Keynesian “paradox of thrift” and it emanates from the “fallacy of composition” principle: being true at the individual level does not make it automatically true at the general level. If a person wants to increase his/her saving level, he/she could achieve this with spectacular success. However, if everyone strives to do this, then things will go awry.

Therefore, when facing economic difficulties as a country, the wise suggestion is not to save more, but to keep the consumption level the same. Economies are based on trust and expectations. An economic crisis could happen out of mere expectations, since people would decrease their consumption levels out of fears of uncertainty regarding the future trajectory of the economy. This is self-fulfilling prophecy.

Therefore, one should underscore not more saving or less consumption, but increasing the productivity level of the “consumption composition” when going through economic difficulties. It is not “more saving,” but “more productive consumption.” Actually, this fact is not known much: the amount of savings in a country is not determined simply by calculating the unspent part of the national income. There is no such calculation and there cannot be within the framework of current national income (GDP-Gross Domestic Product) calculation techniques.

There are three dimensions/sides of national income (GDP), which are production, income and consumption. And total production, total consumption and total income level in a given year in a closed economy must be equal to each other out of logical reasons and mathematical consistency. This is a hard fact regarding national income calculation techniques. Then, where does saving find a place in this story?

Here: national income could be and is split in two parts as “consumption expenditures” and “investment expenditures” and the latter is regarded and labeled as “saving.” That is, we infer the saving level from the investment level. This calculation technique, though indirect, is totally meaningful and understandable: any saving that is not turned into investment is a saving wasted.

Yes, not only in times of economic difficulties, but we always, as earth inhabitants, should avoid wasting resources. In order to achieve this, we need to strive for “more productive consumption” always. Within this framework, the current will of the Turkish government to curb unnecessary expenditures in public institutions is praise-worthy. However, the emergent monetary resources out of decreased expenditures should be channeled to more productive areas.

The public debt to GDP ratio in Turkey is just 28 percent, one of the lowest in the whole world. So, the Turkish government does not need to reduce its overall expenditure level. Hence, the savings to be achieved by, for example, decreasing the number of official cars had or leased by the government could be channeled to R&D (research and development) projects run by the government itself or the private sector. Turkey, on the one hand, could sustain the current level of economic activity and avoid an economic crisis, and on the other hand could feed the long-run economic momentum.

Turkey is tackling an economic turbulence driven mainly by massive speculative attacks on its currency (Turkish Lira). With all their efforts, the economic management team has been taking necessary steps to rebalance the Turkish economy. Two weeks ago the Central Bank of the Republic of Turkey (CBRT) raised the policy interest rate by 625 basis points, surprising financial markets that expected around a 400 basis points hike. The CBRT sent a strong signal that it will maintain a tight stance in monetary policy, ending futile discussions about central bank independence.

After this monetary policy decision, all economic agents held their breath on hearing about the path of fiscal policy that the government will follow in the medium term. The New Economic Program (NEP), which includes macroeconomic targets and fiscal policies to be implemented for the 2019-2021 period, was announced by the Minister of Treasury and Finance Berat Albayrak last Thursday. The initial reactions from the business sector and financial markets for the announced plan are positive, emphasizing that the NEP provides a consistent, realistic and remedial road map for the medium term.

The NEP clearly shows that the first priority of the government in the medium term is to re-balance the economy by slowing down inflation and the current account deficit. To achieve this, the government is determined to implement a more stringent fiscal policy than in the past years. Fiscal policy will be more coordinated with monetary policy over the next three years.

The government decided to reduce some public expenditure items, which are waste and not indispensable, and to collect more revenues from specific areas. These steps are expected to save 76 billion lira (around 12 billion dollars) in public finance. Expenditures on official cars, housing and social facilities will be cut down. Due to drying global liquidity conditions and high interest rates, investment projects for which tender processes have not been started or for which tender processes have been started but not finalized are planned to be suspended. The government targets to improve the tax collection process and widen the tax base.

All these policy actions will help reduce inflation and the current deficit to a certain extent. However, they will not be enough without more structural steps. So, the government needs to also focus on producing more structural solutions to problems. For example, as part of the comprehensive anti-inflationary program, the Product Monitoring Mechanism, in which price fluctuations in food products will be closely monitored by using big data and advanced analytical methods, will be implemented. To deal with the current account deficit in a sustainable way, industrial policies will become more selective, giving more weight to promising sectors, such as pharmaceuticals, petrochemicals, energy, machinery-equipment and software, in channeling public incentives.

By doing so, Turkey can increase value-added and productivity growth, reduce its dependency on imported high-tech intermediate goods and services, and increase its share of high-technology exports. This will help Turkey not only to keep its current account deficit under control, but also increase long-term economic growth.

Unfortunately, tight policies aimed at bringing the economy into a stable path again have some side effects. According to the NEP, Turkey will be highly likely to experience modest economic growth figures below its real potential and high unemployment rates. Weak domestic demand and investment conditions, caused by high interest rates, deterioration in expectations and the depreciation of the Turkish Lira, will cool down economic growth, and in turn increase unemployment rates.

It is important to note that switching to a tight fiscal stance does not mean that the public sector will be out of the economic equation. Turkey does not need to implement strict austerity measures, as the Southern European countries did during the global financial crisis. It needs to reduce redundant government expenditures and wipe out non-effective tax exceptions and other incentives. Thanks to its low level of public debt, the government has fiscal space to provide financial help to firms and industries that are productive and key for the future of the Turkish economy, while maintaining fiscal disciple (not allowing the public deficit-to-GDP ratio rise above 2 percent). For example, in his presentation, Albayrak clearly indicated that if needed, a comprehensive plan will be introduced to strengthen the capital structure of the banking system further and to provide external finance to the real economy at affordable rates. The Development Bank for Turkey will be restructured to offer new external financing opportunities to promising firms and sectors.

Yes, it is important to reveal such a program to improve perceptions regarding the stability and rationality of economic governance, but it is much more crucial to show the implementation of the program. The eyes of all economic agents will be on the implementation of this program. The progress made under this plan will be monitored in 3-month periods by the Public Finance Transformation and Change Office, a new governance establishment for budget discipline. If the NEP is implemented properly, it will not be a surprise for Turkey to regain macroeconomic stability and to grow again at a level close to its long-run potential.

The Turkish economy has been going through a severe financial attack – palpably waged by the U.S. – for some time now. The tweet posted by Donald Trump against the Turkish Lira over Turkey not releasing Brunson is now well known. The remarks of Trump’s social security adviser, John Bolton, are equally “illuminative” regarding the nature of what has been going on:

“This crisis could be over instantly if they [Turkey] did the right thing as a NATO ally, part of the West, and release pastor Brunson without condition.”

It is apparent that the fundamentals of the Turkish economy are strong and that there is no justification whatsoever for such a slump in the Turkish Lira with relevant “figures” such as public debt to GDP and external debt to GDP ratios.

Despite this fact, most Western media outlets have been extremely biased in their coverage regarding Turkey and the Turkish economy. For them, the Turkish economy is not in good shape at all and the plunge of the Turkish Lira is all Turkey’s fault. However, they badly fail as they try to support and underpin their allegations regarding the Turkish economy. For the most part, they resort to political rhetoric, and not relevant economic data. And when they seldom try to support their arguments with numbers, they cherry-pick the data that is congruent with their “fabricated story” regarding the Turkish economy.

Take “short-term foreign exchange liabilities of nonfinancial firms” in Turkey. Some of these media outlets address this ratio to show how the Turkish economy and Turkish firms are vulnerable to external shocks. However, they curiously fail to mention the other side of the story: “short-term foreign exchange assets of nonfinancial firms.” It is apparent that the liability side does not provide the full picture without mentioning the asset side. This is bad journalism to say the least. Then what is the truth? The truth is that the short-term financial assets of Turkish nonfinancial firms are 6.5 billion dollars higher than their short-term financial liabilities!

More to the point, they consistently fail to mention the exchange rate position of the Turkish financial industry, which is one of the most critical figures. What this figure tells us? It is that the Turkish banking sector has around 2 billion TL surplus of net foreign exchange position! Moreover, the capital adequacy ratio for the banking sector in Turkey is over 16 percent. So, it is apparent that the Turkish banking industry is well-hedged and in a rather good position.

These media outlets never mention the public debt to GDP ratio in Turkey, which is 28 percent, and is one of the lowest in the world. They also fail to mention that gross external debt to GDP in Turkey is 53 percent, which is not too low, but not too high either. There are numerous countries where this ratio is much higher than Turkey, such as France (213 percent) and the U.K. (313 percent).

On the other hand, there is one figure that Turkey cannot be proud of, and that is the current account deficit to GDP ratio. Indeed, Turkey has been running relatively high current account deficits for almost two decades thanks mostly to global liquidity abundance and strict monetary policy (particularly between 2002-2008) by the Central Bank of Turkey. In addition, we should add that Turkey has a vibrant and energetic economy to which investors around the world are naturally attracted. The average economic growth rate between 2002 and 2017 was 5.7 percent, which amounts to the doubling of the Turkish economy in just 16 years.

Biased media outlets sometimes try to justify the plunge of the Turkish Lira by appealing to the current account deficit ran by Turkey in hindsight. However, the current account deficit in Turkey did not emerge overnight. More importantly, what the Turkish Lira is experiencing now is not a “correction.” It is much, much more than that. For a currency to depreciate as sharply as the Turkish Lira did, that country must have rather weak economic fundamentals. On the contrary, the Turkish economy and financial industry are strong and robust.

In addition, the Turkish current account deficit to GDP ratio was much higher between 2010-2013 than it is now. The current account deficit in Turkey was already bound to decline due to the inevitable depreciation of the Turkish Lira, as well as other currencies around the world, against the U.S. dollar, as global liquidity abundance has been coming to an end slowly but surely since 2014. Indeed, this is what correction looks like.

One final comparison. The current account deficit to GDP ratio in the U.K. (over 5 percent a year) was considerably higher than that in Turkey between 2013-2016. As of 2017, this ratio was 4 percent for the U.K. I should also add that the external debt to GDP ratio in the U.K. is an incredible 313 percent. This is only 53 percent in Turkey. So? There are no Western media outlets talking about an “imminent” financial crisis in the U.K. Why? Cherry-picked economic data, for a cherry-picked country, Turkey, for clearly political grounds.

Many in Turkey and around the world got shocked as the Turkish Lira depreciated tremendously against the U.S. dollar in the last few days. It goes without saying that this sharp depreciation has nothing to do with economic fundamentals in any sense. This is irrationality and hysteria in action. And for many, it is utterly political as well, as the U.S. president Donald Trump has made it very clear in a tweet that reads “I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!” [Italics added by me] So, it looks like the hegemonic power of the world, the U.S., is going rogue “financially” against its so-called ally, Turkey.

Turkey has undergone five major financial attacks in the last two years. First in November 2016, second in January 2017, third in October-November 2017, fourth in May 2018. This is the last and by far the biggest one. The first three financial attacks, however intense were they, pale significantly in comparison to the last two. And the last one we are witnessing nowadays is an outlier still, in which the Turkish Lira lost its value by around 40 percent within the space of a couple of days.

Such a dramatic devaluation necessitates equivalently dramatic economic reasons if we are to adhere to an economic explanation. Yet there is none. As an economist, it is really difficult for me to try to understand and “analyze” what is going on economically. I wrote several articles both in English and in Turkish for the past two years regarding this very same subject and tried to show that these financial speculations, or “financial attacks” have their roots not in economics but in politics for the most part.

To reiterate briefly, although the Turkish economy has its own weaknesses such as a high current account deficit, as other countries have their own, the Turkish economy looks quite healthy. In addition, external debt to GDP ratio is 53 percent as of 2017. Public debt to GDP ratio, on the other hand, is only 28 percent. This ratio is one of the lowest in the whole world. Moreover, the Turkish financial system is quite healthy with a 16.3 percent of capital adequacy ratio. This holds for non-financial firms too. Short-term foreign exchange liabilities of non-financial firms in Turkey is lower than their short-term financial assets.

I should add that in the last quarter, the Turkish economy fared considerably well, too. The average economic growth rate for the last five quarters is 7.4 percent in Turkey. In addition, the unemployment rate, though relatively high, decreased by more than one percentage point to 9.6 percent in the last year.

Further, no macroeconomic indicator of Turkey went sour in the aforementioned period. Yet Turkey has now been suffering a very dramatic devaluation.

It is apparent for most people in Turkey that the U.S. has been exerting its financial influence on Turkey in order to promote its political aims regarding Turkey. And this is not the first time the U.S. is doing this. Take Chile in the 1970s. From 1970 to 1973, the U.S. strived hard to overthrow the democratically elected President Salvador Allende. As a small part of this endeavor, which is named Project FUBELT, the then President Nixon ordered the CIA to “make the [Chilean] economy scream” in 1970 in an effort to destabilize the country.

Note that these points are not speculations, but declassified facts as Collin Powell, the then U.S. Secretary of State, expressed in 2003 that “with respect to (…) Chile in the 1970s and what happened with Mr. Allende, it is not a part of American history that we’re proud of. I can’t justify or explain the actions and decisions that were made at that time.”

The Turkish economy looks strong enough to weather this irrational and politically motivated financial attack, though it will certainly make a dent in the short term. However, one should note that the U.S. government itself is undermining the very legitimacy of its “strong” currency by abusing its “power” to promote its political ends. This will certainly have important ramifications for the U.S. globally in the medium and long-term.

Turkey has been experiencing one of the most severe speculative attacks in its open-economy era since the beginning of May 2018. The Dollar/Turkish Lira parity, which was 4.1 on May 1, rose to 4.92 on May 23. Such a sudden surge on the currency does not reflect the reality of the Turkish economy. There is a strong economic growth performance, fueled not only by consumption expenditures, but also by investment expenditures and export. The Turkish economy created around 1,2 million new jobs in the last year. The unemployment rate is declining, albeit slowly. As in every country, Turkey also has some economic problems – the high current account deficit and double-digit inflation are two main problems of the Turkish economy. These problems are not new, plus they have not shown a significant deterioration for the last two months.

With the loss of the value of the Turkish Lira, rising food and energy prices were the main triggers of this high inflation rate. Since Turkey’s costs of imported intermediate goods and energy soar in periods when the country enters a phase of rapid growth, an increase in its current account deficit is unavoidably being experienced. Reducing the current account deficit and inflation require supply-side structural reforms. The government is aware of that. Turkish Deputy Prime Minister Mehmet Simsek tweeted: “None of Turkey’s macroeconomic problems are insurmountable. We’ve fixed problems in the past, we can do it again.” President Erdogan said that after the election serious measures will be taken without delay to reduce inflation and the current account deficit. In sum, inflation and current account deficit are not acute problems that could cause such a high jump in exchange rates in such a short time period.

So why is the Turkish Lira depreciating? Although there is no serious deterioration in economic indicators, it is obvious that there is an intense effort to worsen the economic perception as snap elections approach. The deterioration of economic perceptions is paving the way for speculative attacks that cause a surge in exchange rates. The international economic press is circulating news suggesting that the Turkish economy is overheating. In addition to this, international media outlets misinterpreted the statements regarding the future of economic management, which President Erdogan had made in interviews during his London visit.

Many economists and analysts claimed that Turkey is moving away from a free-market economy. This is a cock-and-bull story. But this type of distortional or fabricated news made financial investors anxious. The Turkish Lira depreciated with speculative movements. Following, some foreign investors began to sell their Turkish Lira assets even more to offset the loss. When Turkish companies, which have foreign currency-denominated debt, started to buy foreign currencies, the Turkish Lira depreciated even further.

After an emergency meeting, the Central Bank of the Republic of Turkey (CBRT) raised its late liquidity window rate to 16.5 percent from the previous 13.5. In the speech he made the day the Turkish Lira depreciated, President Erdogan clarified his previous statements as follows: “Turkey is a country that practices free market economy with all its rules and policies. As it is today, we will continue to adhere to global governance principles in monetary policy in the new (presidential) system.” With the statements of President Erdogan and Prime Minister Binali Yildirim, which calmed the financial markets, this rate hike prevented the Turkish Lira to depreciate further. It is not yet over. There will be further speculative attacks before the election. The current level of exchange rate is also disturbing for Turkish companies.

So, what should be done to bring the Turkish Lira to levels that reflect economic reality? First, the CBRT should be more pro-active and take more timely decisions. The last move of the central bank was late. The CBRT should have increased interest rates a week or ten days ago. Until its next meeting, which is on June 7, the CBRT should use forward guidance to steer market expectations and monitor market movements closely. If exchange rates do not loosen as expected, the CBRT should restart to fund the banking system through 1 week repo and tighten its monetary policy further.

Economic ministers should make informative and guiding explanations of the latest developments in the markets and the policy measures taken. The economic management team, including ministers, high-ranking bureaucrats and advisors, should not allow manipulative news circulation on the market by communicating with markets closely. Last but not least, all presidential candidates and political parties should explain their potential economic policies, which will be implemented with the start of the presidential system after the elections.

These are potential short-run policies and moves. In the medium and long-run, Turkey should reduce its reliance on foreign capital inflows by speeding up structural reforms (especially on imported medium- and high-tech intermediate goods, and energy resources) that can reduce its current account deficit, and by diversifying its financial instruments that can increase domestic savings and channel domestic savings to financial markets.

The Turkish economy grew by 7.4 percent in 2017, ahead of China and India, ranking first among the G-20 countries. However, there are some concerns within and outside of Turkey regarding whether the Turkish economy has been overheating or, quite the reverse, whether an economic recession is imminent. These concerns are mostly unsubstantiated.

First, a 7.4 percent of economic growth rate is not too high to justify the overheating thesis, particularly when compared to the long-term average economic growth rate of Turkey (4.7 percent). Moreover, one can argue that the one-quarter slowdown of the Turkish economy in the immediate aftermath of the failed coup attempt has been compensated by the above-average economic performance in the following year.

Second, given the current economic outlook of Turkey, the suggestion of an economic recession could be much more of wishful thinking or scare mongering rather than an informed prediction about the economy. That said, the Turkish economy has its own weaknesses (as well as strengths) as do other economies. Talking about existing economic weaknesses – such as the relatively high current account deficit – as a possible cause of an imminent economic recession, therefore, is not satisfactory at all and lacks a coherent internal logic: Why now? Given that Turkey has had a relatively high current account deficit for the last two decades, she has experienced no economic crisis, apart from the global financial crisis, which emanated from outside and which Turkey recovered more than completely and did so very fast.

There is no perfect economy in the world and no country needs a seamlessly-working economy to avoid a recession or a crisis. What is needed is a relatively healthy economy and the current economic outlook of Turkey does not show any significant sign of unhealthiness. Actually, quite the opposite: The Turkish economy showed its resilience time and again after 2001 and the economic performance of Turkey in that period is quite good, particularly given the global economic situation in the last decade and the continuing hangover of the 2008-09 global financial crisis for a quite number of countries. Actually, given what Turkey has gone through since 2013 in the political sphere, one can easily conclude that the Turkish economy has performed above standards. Therefore, one needs a very good explanation as to why Turkey should fall into a recession in order to be credible.

Another factor concerning some regarding the Turkish economy is the devaluation of the Turkish Lira against the U.S. Dollar and Euro. Between November 2016 and November 2017, the Turkish economy suffered three distinct financial attacks, which resulted in an elevated volatility in the financial markets and rise in the inflation rate to an extent, besides devaluation. While these factors certainly made a dent in the Turkish economy, their scope was quite limited by nature. Volatility and inflation rates can increase just once after a financial attack and these variables return to their normal levels after a while. The marginal efficacy of financial attacks decreases to a great extent with each additional attack.

Some argue that the devalued Turkish Lira could be a real headache for the Turkish economy in the near future. While there are certainly some downsides of a devalued currency both in the short and long run, there are also important upsides. In addition, given that Turkish banks and firms are in a good shape in terms of their foreign exchange position, thanks to a solid financial infrastructure in Turkey, the downsides of the devaluation of the Turkish Lira is quite limited.

Moreover, a developing country such as Turkey needs not an over-valued currency but certainly an undervalued currency. It should be noted that the Turkish Lira had been tremendously overvalued against the Dollar and Euro in the 2000s up until a couple of years ago thanks to the abundant global liquidity and tight monetary policy in Turkey. Only with the dwindling of global liquidity to a certain extent and with – paradoxically – the aforementioned financial attacks, the Turkish Lira has returned a much more balanced level against the Dollar and Euro. Therefore, there is no reason to be afraid of “normalcy.” Actually, it is the overvalued currency a developing country should be avoiding.

All in all, taking Turkey’s economic history and performance as a guide, with all her weaknesses, the prospects of the Turkish economy are relatively high.