The Turkish economy continues to suffer from its crisis which has deepened in 2020. November 2020 began with a rapid deterioration in the price of the Turkish lira due to the decision by the Central Bank (TCMB) to keep the interest rate unchanged during October 2020, until the price of the lira reached 8.58 liras to the dollar. However, with the change of the TCMB governor and the new governor’s announcement of a return to traditional policies, his decision to raise the interest rate, the dismissal of the Finance Minister Berat Albayrak, and the remarks by President Recep Tayyip Erdogan about “drinking bitter medicine in order to save the Turkish economy”, the lira rate improved rapidly in light of this positive climate, and optimism returned of obtaining new foreign investments.

However, the negative statements by the US Secretary of State Mike Pompeo about Turkey regarding the Russian S-400 missiles, the possibility that the European Union (EU) would impose sanctions on Turkey at its summit scheduled for 10 December 2020, and the subsequent decision by President Erdogan to back away from undertaking the required reforms under pressure from his nationalist partner, brought back the climate of confusion and volatility. Despite the slight improvement in the Turkish economy at this stage, the return of the lockdown measures in Turkey due to the coronavirus pandemic, preventing discipline in financial spending, strongly threatens that the climate of acute crisis will return in Turkey after two months.

Decisions of the TCMB and the Ministry of Finance

Surprisingly, President Erdogan recently dismissed the governor of the TCMB Uysal, and appointed in his place the former Finance Minister Naci Agbal. Agbal is distinguished by his background as a bureaucrat in banks and the financial sector. He is also a former Finance Minister of Turkey and President Erdogan's advisor for strategy and budget affairs. Therefore, he is respected among the economic circles that saw in his choice a real desire to return to traditional financial policies. Immediately after he took office, he announced that he would adhere to global financial policies.

Then came the resignation or dismissal of Finance Minister Berat Albayrak, President Erdogan’s son-in-law, on 8 November 2020, to be replaced by the former Deputy Prime Minister in Ahmet Davutoglu's government Lutfi Elvan, who is also a former Minister of Development. Accordingly, it seems clear that President Erdogan's choices by appointing former ministers who are well-known in the economic milieu were meant to restore market confidence in the Turkish economy and give important signals of change. This reflected positively on the markets, so much so that many financial companies and international banks, such as Citibank, Duetsche Bank, HSBC and J.P. Morgan, all regarded those changes as a rebirth of the economy and financial policies in Turkey. However, at the same time, they did not neglect to refer to the existence of fundamental problems in the Turkish economy, in addition to the possibility of President Erdogan's return to intervention once again, which remained as a dominant concern in those assessments.

On 19 November 2020, the new TCMB governor announced raising the interest rate by 475 points to reach 15 percent, which is an important development that confirmed the new trend. However, in practice, the old TCMB governor, who kept the interest rate in October 2020 at 10.25 percent, had practically allowed the banks to deal among themselves at an interest rate of 14.75 percent. This means that the real interest rate hike did not exceed 0.25 percent only. In any case, the move ended the chaos of multiple interest rates between banks and financial institutions, given that foreign investment institutions demand that the interest rate be raised to 17 percent as a condition for the return of foreign investments to Turkey, taking into account that the real inflation rate in Turkey is 15 percent, as opposed to the official Turkish government figures of only 12 percent.

Despite the persistence of the crisis as a result of the decline in the TCMB foreign exchange reserves, the steps taken by the governor of the TCMB and his remarks which underlined that priority now lies in reducing the rate of inflation, were considered a modest but acceptable start to a new phase that may partially restore confidence in the Turkish markets, pending stronger and bolder steps ahead.

In this context, it must be said that while those steps that were taken by President Erdogan were aimed at restoring the confidence of foreign markets in Turkey, the basic problems remained the same, the most important of which being the TCMB's foreign exchange reserves which declined to minus 50 billion dollars, the increase in local and government debts in dollars, and the continued tendency by the citizens to buy dollars and their lack of confidence in the Turkish lira. Most importantly, due to its foreign policies, Turkey continues to be vulnerable to EU and US sanctions over the next three months, which would cause a major crisis that may not be solved by merely raising interest once again. In addition, the second wave of the Covid-19 pandemic is hitting hard and has led the government to take precautionary measures through partial lockdown. It seems clear that the Turkish government will find it difficult to finance its budget for 2021 with the increase in interest rates. In this context, the Ministry of Finance was forced to borrow from abroad nearly 2.5 billion dollars in order to provide foreign exchange in the local market where Turkey was forced to pay a high interest rate of 6 percent.

Market developments

Prior to the changes in the TCMB leadership and the Ministry of Finance, the state used to borrow locally in Turkish lira through two-year local bonds at an interest rate of 15.4 percent. However, after those changes, the Ministry undertook a new two-year local borrowing at an interest rate of 13.8 percent. As for the 10-year local borrowing, its interest rate decreased from 14.6 percent to 12.3 percent. It is noteworthy that Turkey was able, for the first time in two years, to market ten-year bonds. The points of international insurance on Turkey's foreign currency bonds (Eurond) also decreased from 550 to 380 points, given that the average insurance points on the external debts of developing countries are only 150 points.

With the new changes in the economy leadership, the Istanbul Stock Exchange (BIST) has reached a new record high, and its index rose from 1,112 points to 1,345 points during November 2020, thanks to the entry of foreign investors in the amount of nearly one billion dollars, most of which were invested in the purchase of Turkish bank bonds. On the other hand, the number of real estate sales decreased during October 2020 to 120,000 residential units only, with an immediate reflection of the higher interest rates, given that new properties accounted for only 30 percent of those sales.

Balances of payments and foreign trade

Exports in September 2020 amounted to 16 billion dollars, while imports amounted to 10.8 billion dollars. Therefore, the deficit in the balance of foreign trade during the nine months of 2020 amounted to 37.8 billion dollars, while the deficit in the Turkish budget for September 2020 was nearly 4.2 billion liras. The annual deficit reached 143 billion liras, an unprecedented record. The government has started to collect some additional taxes by raising car sales taxes in the last two months. However, the market for car sales abroad has been declining due to the coronavirus pandemic. The percentage of foreign tourists in Turkey during the past months has also decreased to 75 percent compared to 2019.

The TCMB’s foreign exchange reserves (except for gold and money from SWAP agreements with Qatar and a number of local banks) during October 2020 amounted to minus 47.9 billion dollars, while the amounts that Turkey is required to pay abroad in hard currency within one year exceed 182 billion dollars. Reports of the International Monetary Fund (IMF) confirm that Turkey does not have enough foreign currency to pay off its foreign debts. Furthermore, during October 2020, dollar-denominated hard currency accounted for nearly 58 percent of the internal and external treasury debts, a high percentage that has not been seen by Turkey since 2003.

Expectations

The Turkish economy is expected to achieve growth in the third quarter of 2020, benefiting from the fiscal expansion policy, low-interest loans distributed by state banks, and a reduction in the interest rate during the past three months. However, it is too early to predict whether this growth would continue in the fourth quarter, given that with the rise in the interest rate, the continuation of the coronavirus pandemic in a stronger form, and the failure of the full return of confidence in the Turkish economy, growth would likely decline in the fourth quarter of 2020.

During September 2020, an inflation rate of 12 percent was announced. This percentage is expected to be sustained until the end of 2020, according to official figures that are questioned by independent and foreign economic circles. Furthermore, according to official figures, the unemployment rate remained at 13.2 percent during the past three months, and the number of unemployed in Turkey reached nearly 9.6 million people. The consumer confidence index continues to be at 80 out of 200 points, indicating continued pessimism regarding a near improvement in the Turkish economy.

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