The immense natural disaster that has befallen Turkey makes yet another year in 2023 even more unpredictable, one that was already very uncertain. Given the need for more visibility, we are staying out of this country.
The currency slide is not over
Where is Turkey going? This is the question that a good part of the country’s population is asking. While inflation has been worrying around the world for several quarters, it has been particularly problematic in this country, where it peaked at 85.5% in October and ended 2022 at 64.3%.
President Erdogan and his homemade economic theories have much to do with it. According to him, it is high-interest rates that cause inflation. So the cure for inflation is lower interest rates.
Confident and with all the levers of power, he did not hesitate to push the Turkish Central Bank to follow him. But this is only sometimes done in a country that needs more savings and is therefore very dependent on foreign capital to finance itself.
With key rates at only 9.0% and the entire Turkish yield curve offering less than 11.5%, real yields remain highly negative on the Turkish bond market. As a result, the share of debt held by foreign investors has become residual. The latter depart from it, especially since these assets are hazardous. And without them, the lira is suffering, continuing a steep decline that only the central bank’s repeated interventions on the foreign exchange markets can control.
Ankara prefers to emphasise that the weak lira makes Turkish production more competitive and thus helps boost exports. The latter is growing at a good pace (+11% year-on-year in January), reaching USD 19.4 billion. Although Turkey is also a major importer of raw materials and energy, imports are growing even faster (+21% over one year), reaching 33.7 billion USD).
Turkey’s trade deficit continues to widen. The country will continue to need foreign currency to fill it. Thus, even if Russia accepts that Turkey pays its oil in Turkish lira, the Turkish currency is not out of business, and its pressures are likely to remain intense. Although inflation will fall in the coming months against the peaks of 2022, a return to levels close to the central bank’s targets is not to be expected. This is not likely to calm inflation.
A multi-speed economy
This very high inflation creates a multi-speed economy. Faced with the erosion of the value of their currency, Turks who hold capital rush to buy assets - financial or real estate - to protect their savings. They are not the only ones. Having kept the door open to the fund from Russia, Turkey has become a privileged passage for Russians who want to invest their money outside.
In 2022, tens of billions of euros of Russian money would have found refuge in Turkey. And here, too, it is in the equity and real estate markets that this capital is oriented. Russian home buyers increased by more than 200% in 2022. As a result, asset prices are soaring everywhere: Turkish equities posted the best performance of 2022 with a gain of 98.5% (price and yield, in €) and 162% in local currency.
Residential real estate does even better. The national housing price index rose by 190% in September, and prices in Istanbul rose by 212% (in local currency).
On the other hand, inflation, which is growing much faster than wages and rising real estate prices, has been catastrophic for Turkish households' generality. Consumers are seeing their purchasing power eroded at high speed, while expensive credit also weighs on their ability to consume and invest. For young people, access to the property is no more than a mirage.
The devastating earthquake that has affected millions of Turks will leave many facing significant problems in finding a home or rebuilding their own when credit is scarce and prices are soaring.
Aware of the growing discontent of the middle classes just a few months before the presidential election in May, President Erdogan is forcing the state banks to increase access to credit and decreeing an increase in public service salaries. And for all chances to be on his side, part of the opposition was declared illegal.
Huge potential wasted
The current state of Turkey is all the more regrettable as the country has undeniable assets that could well make it successful: at a time when the trend is to shorten production and supply chains. Moreover, when more and more companies want to reduce their dependence on China, Turkey, with its proximity to the European Union’s markets and its abundant and inexpensive workforce, would be well placed to be to Europe what Mexico is to the United States: An important supplier but also a market of choice.
Turkey’s strong demographic makes it an attractive market for European companies. Moreover, more and more skilled Turkish workers and Turkish companies in the sectors of the future - which abound in the country - would have much to gain from better integration with the European Union, allowing them more accessible access to capital.
This market of nearly 100 million inhabitants would be desirable for European companies. But the state’s stranglehold on the economy, the ease with which it appropriates the foreign reserves of the private sector, the exorbitant inflation that makes it impossible to plan the future correctly, and the nuances of the Turkish credit market, which allows some well-placed actors to finance themselves at a reasonable price. In contrast, others are left behind and are not likely to reassure.
While waiting for either better economic governance or a significant crisis that seems inevitable to us if nothing changes and which will otherwise make Turkish financial assets cheaper, we remain on the sidelines of this country.
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