On exchange rate pressure in Turkey

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The currencies of developing countries, particularly the Turkish lira, are quickly losing value against the dollar these days. Does this also correspond to a real economic crisis for these countries? Should Turkey choose to become a debt and import economy again by increasing interest rates and keeping the lira overvalued, or should it take a new growth path based on production and exports with economic distress? Let me begin answering this question by saying what the U.S. is doing with the dollar, a basic reserve currency.

The U.S. has been trying for a while to reconsolidate its economy through the dollar. U.S. President-elect Donald Trump's recent statements reflect this consolidation. Trump asked American capital holders why they go to Mexico and invest there, iterating his insistence that they invest their capital in the U.S. The U.S.'s appreciation of the dollar with high interest rate expectations that depend on its concern about external financing is also related. But we cannot say that such a move is right for a power that maintains its claim to lead the world economy. This is because economic sovereignty is possible with the export of commodities and capital. An economy that does not export capital cannot rank among the central economies, let alone become the top economy in the world. In other words, the U.S.'s strategy, which is based on the overvalued dollar, is not suitable for the long-term.

But this cannot satisfy anybody in Turkey at the moment. There is a basic reserve currency; you establish commercial relationships with other countries using that currency and your own currency also depreciates against it. It is then necessary to question whether this exchange rate level will lead to a financial crisis for the public and real sector in Turkey. A couple days ago, Energy and Natural Resources Minister Berat Albayrak said there would not be a hike in energy prices in 2017. Even this alone shows that the public sector in Turkey is strong enough to resist increases in foreign exchange rates to the real sector and households, and that there are no exchange rate problems in the public balances. As for Turkey's external debt and exchange rate risk, we can say: Compared to the "total debt / gross domestic product (GDP)" ratios calculated from the financial accounts of selected countries, Turkey's gross total debt is about 40 percent of its GDP - which stands out as the lowest rate among other countries. On the other hand, as of the first quarter of 2016, the debt of general management, households and financial institutions in Turkey is on a much lower level than those of other countries. It is noteworthy that the debt of non-financial institutions is higher than some countries, while they are close to the eurozone average.

In brief, the total debt of the established sectors in Turkey is largely domestic; it has been declining since the third quarter of 2015 in terms of its ratio to GDP, and it hovers around low levels when compared to other countries. Moreover, the banking system in Turkey, including state-run banks, has almost no foreign exchange gap. And the banking system's capital adequacy ratio now has an average of 13 percent - the highest capital adequacy ratio in the world.

Despite all this, the rapid rise in foreign exchange rates is unacceptable, but we are not going to discuss that level here. We are will discuss the fact that the solution is not fast and predictable.

In this regard, I would like to touch on two important issues. First of all, Turkey is taking steps to remove its foreign exchange and capital markets from the problems that result from that fact that those with around $100 billion have the power to budge foreign exchange rates. Despite many deep objections, this is one of the founding objectives of the Sovereign Welfare Fund (SWF) and there are many other things to be done in this area.

Turkey's money and capital markets will be restructured for more security and stability. Here, major reforms will be introduced. Turkey is one of the most open markets in the world in terms of money and capital markets. In addition to a light hand on capital movements, the Turkish government does not even ask taxes from those who bring foreign currency from abroad nor ask for the source of this foreign currency, as in accordance with the law on the repatriation of capital.

Second, let us accept that the Central Bank of the Republic of Turkey (CBRT) followed exchange rate targeting with interest rates even during the floating exchange regime period after the 2001 crisis and attempted to first control the inflation and then the financial markets in this way. In other words, the issue of financial stability was understood only as a matter of trouble-free transfers and a good number of funds abroad. The lira remained overvalued for a long period of time, leading to an economy of imports and unnecessary debts. These erroneous policies have had a big part in the rapid depreciation of the lira nowadays and some are pressuring even the CRBT to apply these policies, using exchange rate rise as an excuse. Correcting a mistake and replacing it with truth is not possible without pain. Now we are suffering from this.

Finally, I would like to say that the CBRT is experiencing one of its strongest, most determined independent periods in its history. There are many steps it must to take, and we will see it this month.

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