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Plunging Lira, early elections
President Erdoğan surprised everybody this week by rushing the country into early elections on June 24. That’s in two months, mind you. Why this rush? I think the unbearable and uncontrollable plunge of the Turkish Lira is the major culprit.
First, the weakness of the lira is unbearable considering the huge foreign exchange debt of the private sector. It has the potential to raise corporate arrears very swiftly, which is detrimental to the banking system. It’s very easy to move from insolvency to illiquidity when that process starts. Second, it is uncontrollable due to the election cycle. I often remember Turgut Özal’s rather candid remark regarding the special dynamics of the election cycle. “Do I look that stupid to raise prices just before the elections?” he said on one occasion. Price hikes don’t make for happy voters. Campaign season is no time for structural reforms and fiscal measures to calm the markets. It wasn’t back in the 1990s, and it isn’t today, not in Western democracies, nor in Turkey.
That puts Turkey in a bit of a dilemma. The world has moved from quantitative easing (QE) to quantitative tightening (QT). If QE is about too much money chasing too few bonds, QT is just the opposite. This is a period with less liquidity and more intense competition for funds. That’s bad for Turkey in general, as a wide savings deficit is a salient feature of the Turkish economy. Yet due to this election, domestic easing will continue. Domestic easing in a global QT environment makes Turkey more and more vulnerable to external shocks. High growth in 2017 with too much domestic easing has started to humble the Turkish Lira already.
Turkey has always had a savings deficit. The current account deficit has always been with us. Domestic easing means more of the deficit will be funded by foreign savings. This is what made Turkey vulnerable in the first place. This is why the lira is now plunging again. The overheating of the economy in 2017 is now taking its toll. Continuing this domestic easing until November 2019, which was the scheduled date for elections, in this global QT environment would have been too much risk to take. Not enough time to reform your economy, too long a period to sustain the unsustainable. Add to this the rising nervousness of domestic investors. It’s all terrible for politics.
I feel like “an optimist with a lot of worries,” as Madelaine Allbright said in an interview with the Daily Beast recently. Let me start with optimism. There are two types of countries in this region. There are the countries where we know the results of elections before the election date and those where you know the election results only after the elections.
Just think about the elections in Russia, where President Putin was elected by more than 75 percent of the electorate, or the Egyptian elections where President Al Sisi was elected by 97.8 percent. These countries belong to the first category. Turkey is still in the second camp where ballot box still means something.
But people are worried. This rush to the polls under the state of emergency-a-la Turca should raise concerns by definition. The SoE has weakened the Turkish judiciary. Judges are key to ensuring the fairness of elections, especially this June. The fairness of the election is now by itself important for the short and medium term stability of the Turkish economy. If that strain should weaken, the lira will weaken further.