It is increasingly clear the
global economy is slowing down. And a few months ago the epicenter for
that slowdown was Turkey.
The Turkish Lira melted down
as fears over its massive pile of corporate debt, most of it denominated in
dollars, began selling off. And that had contagion effects into Europe
since yield-starved banks went looking for some thanks to the ECB’s negative
interest rate policy.
So, at the time everyone was
losing their minds. The very public tiff between Presidents Trump and
Erdogan over geopolitical issues became acute. Days later Turkey’s currency is
under extreme pressure.
At the time I called this a
political hit to try and remove Erdogan from power. I was
right about that. I was also right that Turkey would be helped from all sides
to survive this attack.
Turkey’s real allies — Russia, China, Iran and Qatar — came to
its defense. Qatar pledged some forex support, China upped its
trade. Bilateral swap arrangements were signed, trade deals cut, etc.
All This began shifting the Turkish economy away from the U.S.
dollar and reorient itself with its biggest trading partners, which also
includes the European Union.
So, imagine
my shock this morning when Turkey’s latest debt numbers and how
they’ve changed since the Lira crisis ended suddenly with the return of Pastor
Andrew Brunson and l’affair Kashoggi.
The sector’s long-term debts reached $213 billion as of October, down $9.1 billion from the end of last year, the Turkish Central Bank said in a statement.
The bank also said the sector’s short-term loans — debt that must be paid in the next 12 months — fell $2.7 billion to $15.9 billion during the same period.
Those are the important numbers. They aren’t good, but
they are significantly better. And exactly the kind of thing that needs
to occur if Turkey is going to extricate itself from the mess it is currently
in.
Raising
interest rates sharply induced a mass of domestic savings, up a whopping 20%
year-over-year. Turkey is now in a position to issue short-term foreign currency
debt to mobilize some of that savings and convert more dollar
and euro corporate debt into lira debt.
It’s a shell game for sure, but it’s born of necessity while
Turkey narrows its trade deficit. Savings is re-denominated to assist the
most vulnerable Turkish firms while their debt is paid off or restructured.
The banks are somewhat recapitalized thanks to strong savings.
These firms are seeing stronger exports thanks to the
cheaper lira while domestic energy costs have attenuated over the past few
months with sharply lower oil prices.
Turkey’s Balance of Trade
Remember, Turkey is a
huge energy importer and who does it buy the lion’s share of its energy
from? Russia and Iran.
Watching this play out is
so similar to what I saw in Russia in 2015. The world piled on and
thought Russia would never respond to the pressure. Russian firms
were barred, because of sanctions, from rolling over their debt, they had to
pay it off.
But, they did and now
they, too, are running record trade surpluses, which will fall now with lower
oil prices, but domestic energy prices are low keeping profits up and the
reorganization of the Russian economy on pace.
Turkey isn’t out of the
woods yet. There will be periodic funding walls which occur where large
tranches of corporate debt will need to be paid off or rolled over putting
upward pressure on the lira. And any strong dollar moves will also weigh
heavily, like what’s happening now.
But, the worst is past
because policy has fundamentally changed domestically. Erdogan understands his economic future
lies in Asia not Europe and the U.S.
