Turkey: the new Greece or the new Thailand?

Liseth Galvis-Corfe - 23 August 2018

Turkey is the latest in a long procession of countries to accept the international invitation to accelerate its economic development using leverage. The debt ratio for the private non-financial sector in Turkey has risen from 49 per cent of GDP in Q4 2009 to 84 per cent of GDP in Q4 2017. In March 2017 the government reinforced the lending boom through infrastructure spending and by increasing the size of its Credit Guarantee Fund, which guarantees loans to small and medium-sized businesses. The leverage party is over. With the IMF waiting in the wings, will Turkey emulate 2012 Greece or 1998 Thailand in its rehabilitation?

Figure 1 reminds us of the tortuous growth experiences of Turkey, Greece and Thailand over the past 20 years. All three nations have suffered an annual output contraction of 10 per cent or more; Thailand, in the context of the Asian financial crisis, Greece, in the midst of the Eurozone financial crisis and Turkey, as a consequence of the 2002 earthquake and during the global financial crisis. The distinction between these cathartic experiences lies in the speed of recovery from the crisis. Hitherto, Turkey has rebounded vigorously, like Thailand in 1999, and unlike the grinding misery of Greece within the European Monetary System.  However, can it do so again?

There are many parallels between the experiences, and economic choices, of Turkey and Greece. Before the global financial crisis, Greece enjoyed a growth improvement from virtually zero at the start of 2005 to more than 5 per cent in 2007. This increase was supported by the growth of unsustainable debt. Figure 2 shows that in this period credit to the private non-financial sector in Greece changed from 76.3 per cent of GDP to 96 per cent of GDP. In December 2009, Fitch cut Greece’s long-term debt to BBB+ grade, from A, which increased borrowing costs. Similarly, in August 2018 Fitch, downgraded Turkey’s long-term debt to a B+ grade. The rating agency also forecast a recession for Turkey in 2019.

Greece has run a perennial current account deficit, but it exploded from 7.4 per cent of GDP in 2005 to 14 per cent in 2008. Currently, Turkey’s current account deficit is equivalent to 7 per cent of GDP. As imports become more expensive and capital outflows accelerate it is likely that the external position will erode further, exacerbated by the 60 per cent depreciation of the Turkish lira since the start of 2018.

The two countries also have in common that their governments have opposed traditional recovery measures to mitigate their crises. In 2015 when Greece was in its adjustment crisis, the left-wing Syriza government rejected orthodox economic policies (austerity) that experts recommended to keep finances under control. It is estimated that this delayed the recovery by three years. In the case of Turkey, Erdogan has opposed increases in interest rates to control inflation, now running at an annual 16 per cent. From his peculiar perspective, interest rates are “the mother and father of all evil”. The appointment of his son-in-law as Finance Minister is another disturbing aspect for markets.

The obvious difference lies in the scope for currency adjustment, which was unavailable to Greece, as a party to the Euro. While Greece received financial support through its membership of the EMS, the terms and conditions were unappealing. Turkey will also have to endure a painful period of adjustment if decides to request a loan from the International Monetary Fund (IMF). The recent dispute with the US has worsened bilateral relations. Last week Trump announced import duties on Turkish steel (50 per cent) and aluminium (20 per cent) as a retaliatory measure because Turkey failed to release pastor Andrew Brunson. The US has veto in the IMF, if Turkey applies for a bailout, arguably it will confront more barriers than Greece.

Despite the problems with the US, Turkey has the major advantage of its monetary independence and in this, the hope remains of a short, sharp shock followed by a rapid rebound, as in Thailand after the Asian crisis. Thailand suffered also currency depreciation but, with financial restructuring and fiscal discipline, managed to keep the economy on track. Erdogan’s authoritarian government presents a huge obstacle to the emulation of these policies in Turkey.

Figure 1

Data source: CEIC

Figure 2

Data source: BIS

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