Turkish President Recep Tayyip Erdogan is tightening his political grip on the Turkish economy, trying to fend off an unprecedented financial crisis.
At first sight, Turkey is facing an international crisis.
Turkey, Argentina and Brazil have been exposed to dollarized debt. In Turkey, debt denominated in foreign currency amounts to over 40% of the total portfolio of Turkish banks. As the US Federal Reserve is hiking interest rates, the Turkish Lira has lost just under 40% of its value.
That is not a Turkish crisis alone.
Capital flight and currency devaluation are threats undermining a number of emerging economies. However, the political risk associated with the Turkish crisis is making matters worse.
Erdogan undermines market confidence
Ankara made a significant step towards restoring market confidence on Thursday, September 13, when the Turkish Central Bank hiked interest rates to 24%, up from 17,5%.
Significantly, the decision contradicted directly the political wishes of President Erdogan, which appeased markets by restoring confidence in the relative independence of the Central Bank in determining monetary policy.
That confidence was undermined in August, when the Deputy Governor and Monetary Policy Board member Erkan Kilimci submitted his resignation, apparently protesting Erdogan’s insistence in lowering interest rates amid galloping inflation.
But, newfound confidence in independent monetary policy lasted less than a week.
The Isbank crisis
Turkish President Tayyip Erdogan said on Monday, September 17 that authorities should look into the political control of the leading opposition Republican Party (CHP) on the board of Isbank.
Türkiye İş Bankası or İşbank is Turkey’s largest bank. It is also the first bank founded by the Turkish Republic, and one of its biggest shareholders was the founder of the Turkish Republic, Mustafa Kemal Ataturk.
Four CHP members seat on the board of Isbank, representing a 28,09% share owned by Ataturk, as administrators of his legacy. The party does not receive dividends, which are distributed to charitable foundations.
In a statement to Hurriyet newspaper on Monday, President Erdogan wondered what did the four members of CHP do on the executive board. The President of CHP, Kemal Kilicdaroglu, said his party does not interfere with the management of the bank, speculating that the President wants the nationalisation of the lender.
Speculation on the bank’s nationalisation triggered a depreciation of Isbank’s shares by just under 6% on Tuesday. The Turkish Lira lost 2% of its value.
Turkey’s Sovereign Funds
Erdogan’s targeting of Isbank echoes the experience of Asya Bank, a lender linked to Islamic Hizmet movement led by the Philadelphia-based cleric Fethullah Gülen. The lender’s shares were transferred to Turkey’s sovereign wealth fund (TVF).
Founded in 2016 to develop and increase the value of national assets, TVF represents a formidable actor in the Turkish economy. The fund owns majority stakes in a string of mega-corporations such as Turkish Airlines, Ziraat Bank, pipeline operator BOTAS, oil company TPAO, the national postal service, the Istanbul stock exchange, the satellite communications company TURKSAT, the national lottery, Halkbank and Turkish Telekom.
The total portfolio is currently valued at $200bn, although the accuracy of such estimates can be called into question.
On Wednesday, September 12, President Erdogan appointed himself the head of TVF.
That allows the President to raise foreign funds via TVF-issued bonds to refinance Turkish debt. Over the next year, Turkey will need to raise $230bn in external funds to roll over its public debt.
Turkish crisis management and Europe’s problems
To shield the economy in the short run, finance minister Berat Albayrak introduced a series of measures.
One measure stands out: Turkish companies are no longer required to report losses from foreign currency appreciation, which should decelerate bankruptcies. However, this also means risk assessment is harder for both lenders and international investors.
Officially, non-performing loans stand at 6% of total banking assets but are rising.
Overall, the economic climate is deteriorating.
Turkish growth is decelerating, mainly due to subdued demand and declining foreign investment, Bloomberg reports.
The jobless rate has pushed beyond 10%, while inflation has reached a 15-year high, according to Hurriyet. According to the national statistical service, inflation reached 18% in August, year-on-year.
For 70% of the workers in the private sector, there is no wage-adjustment and inflation is a direct hit to purchasing power, Al-Monitor reports. That is a dire situation, given that 60% of the Turkish workforce takes home the minimum wage of 1,600 Liras (circa $255), or less. That means Turkey could be heading towards a mortgage default crisis.
Europe is watching with some concern.
According to the Bank of International Settlements, Turkish banks have issued $148 billion dollar-denominated and €100 billion euro-denominated loans. Spain’s BBVA, Italy’s UniCredit, France’s BNP Paribas, Dutch bank ING and Britain’s HSBC are exposed through local subsidiaries or loans. The size of the exposure means that the Turkish crisis could quickly become a European crisis.