Instant obsolescence of the Turkish model
With the Turkish lira in free-fall, Recep Tayyip Erdogan looks less like a
prospective Ottoman caliph than a garden-variety Third World strongman whose
patronage machine ruined the national currency. The Turkish prime minister's
"neo-Ottoman dream" (Amir Taheri) for a "new Ottoman region" (Harold
Rhode) reached its best-used-by date last December, when Turkey's stock market
quadrupled in value from its 2009 crisis low. The deflationary wind that rocked
American markets last week may flatten Turkey's.
MSCI investable Turkish index ETF (TUR)
Since then, the Turkish market has lost two-fifths of its value in
dollar terms, and the Turkish lira has fallen farthest of the world's major
currencies, close to its 2009 crisis low. Turkey's financial unraveling has
only begun. On March 1, I warned that Turkey was "a developing market to
avoid". With the carnage in global markets, Turkey's problems barely made the
back pages. But the strategic importance of Turkey's currency route will become
a major theme for foreign policy during the next several weeks.
By contrast, other emerging market currencies have soared: Brazil's currency
trades 70% above its 2009 low, and Russia's by 25%. Unlike the emerging
countries with whom it competes, Turkey's current account deficit is out of
control. It exceeds 10% of gross domestic product (GDP), about the same as
crisis-ridden Greece and Portugal. Turkey's central bank has let the currency
slide in a belated effort to correct the imbalance, but the lira's depreciation
Turkey's supposed return to world power has captivated the foreign policy punditeska
for years. In April 2009, President Barack Obama made Turkey his first overseas
trip and hailed his "model partnership" with the country's Islamist leader as a
pillar of America's relationship with the Muslim world.
During the first weeks of the so-called Arab Spring, countless commentators
hailed the "Turkish model" as a template for democratic reform in the Arab
world. Political models are like automobile models, I offered at the time: you
can't have them unless you can afford them. Turkey was not a paragon but a
rickety platform, I argued (
The Heart of Turkness), Asia Times Online, March 23, 2011). It turns
out that even Erdogan can't afford the Turkish model. He has been living on
borrowed time, literally.
Turkey's annual credit growth rate
Source: Central Bank of Turkey
Bank credit is rising at a 30% rate for households and a 40% rate for business,
after adjustment for inflation. The country's GDP growth at an 11% annual rate
in the first quarter - the world's highest - because the credit bubble boosted
"Turkey’s current account deficit is a frightening 8 per cent of GDP and is
expected to hit 10 per cent before the end of the year," the Financial Times
wrote August 4. "And the deficit is badly funded, with only about 15 per cent
covered by foreign direct investment and the rest by portfolio flows."
Short-term debt held by banks and hedge funds, that is, finance most of
Turkey's enormous deficit. The market is worried about Italy, whose debt has an
average maturity of seven years. Turkey's foreign debt has short maturities and
has doubled in the last year and a half.
Turkey's external short-term debt (US$ millions)
Note that Turkey financed its current account in part by offering high interest
rates on short-term Turkish lira deposits. As the lira depreciated, Turkey had
to borrow in dollars. The country's overall debt levels remain low compared to
the weaker European countries, but the growth rate is alarming. To correct it
will require a severe retrenchment of domestic consumption.
Erdogan's bubble recalls Argentina in 2000 or Mexico in 1994, where a brief
boom financed by short-term foreign capital flows led to currency devaluation
and a deep economic slump. In the advent of the June 12 national elections,
which returned Erdogan as prime minister, the Turkish government bought votes
through cheap credit. As the chart below makes clear, the bulge in credit
growth drives the credit bubble.
Turkey: Total credit growth (horizontal scale) vs current account deficit
(vertical scale), 2006 to present
Source: Central Bank of Turkey
As the total rate of credit growth surpassed the 30% mark, the chart shows, the
current account deficit ballooned (that is why the trend line curves sharply
downward). This implies that Turkish banks pumped so much credit into the
economy that demand exhausted domestic sources, and drew instead on imports.
Financing higher consumption with short-term debt helps explain why Erdogan's
Justice and Development Party (AKP) crushed its secular opposition in the
elections. Erdogan campaigned on his success as an economic manager rather than
his Islamist ambitions, with good reason, for most Turks cares more about
material welfare than the AKP's religious agenda.
An economic slump would undercut Erdogan's ability to govern. His confrontation
with his country's military leaders, who last week resigned en masse to protest
the persecution of senior officers on fanciful allegations of political crimes,
points to the deep fissure in Turkish politics.
For the time being, Erdogan has the upper hand: no longer will the mainly
secular military will not overthrow a civilian government. But Erdogan's
Islamists face entrenched and embittered opposition after three years of mass
arrests of political opponents, journalists and military officers on flimsy
charges of coup-plotting. The silent majority of Turks has gone along with
Erdogan because the economy has improved, and his political fortunes could turn
as suddenly as the Turkish currency.
Turkey has a few sources of economic strength. Its university system trains
some world-class engineers and managers, but they comprise a thin stratum atop
a mass of backwardness. Most Turks barely afford the elements of middle-class
life, and many of them do not at all.
Only 26% of Turkish children graduate secondary school, compared to 44% in
Mexico, 64% in Portugal, and 83% in Poland. Low-value added products (textiles,
apparel, furniture, appliances autos) dominate its export profile. On the other
hand, it is a net importer of food. Turkey's most important export is labor: 10
million Turks or Turkish-speaking citizens of the Central Asian states work in
Despite a few successes, what the Western media hailed as "Anatolian tigers"
never got the Turkish economy up to take-off speed.
Now that the Cairo mob has turned against the "Internet-savvy" protesters on
Tahrir Square, Libya and Yemen remain immersed in civil war, and Syria's Bashar
al-Assad regime butchers civilians, there is not a single stable polity in the
Arab world outside of Saudi Arabia, whose circumstances are unique. What I
called "the Internet bubble in Middle East politics" in a February 16 essay
has popped, to the embarrassment of the Western reporters who drooled over the
Internet cafe-flies who prompted Egypt's popular rebellion.
If it turns out - as I predict - that the "Turkish model" differed little from
the old Latin American borrow-and-bully model, we should conclude that no
successful political model presently exists in the Muslim world. Starting with
former United States president George W Bush, a credulous West embraced Erdogan
as the exemplar of moderate Islam who would build a bridge to modernity.
This was delusional from the outset. In the long term, we are all dead, but
Turkey is dead long before most of us. As I explained in the March 23 essay:
is not on Turkey's side. Educated Turks in the more developed West have a
fertility rate of about 1.5, the same as Western Europe; the Kurds in the
country's impoverished east have four or five children. Kurds, whose
independence movement has cost tens of thousands of dead over the past 30
years, may become the majority within two generations. If Turkey holds together
at all, it will be quite a different place.
desperation informs Erdogan's frantic efforts to restore traditional Islamic
constraints to a country that sloughed them off 80 years ago. "If we continue
the existing [demographic] trend, 2038 will mark disaster for us," he said in
May 2010. Desperate men take short-cuts, such as locking opponents up and
luring short-term money in. The short-cuts seemed to have reached a dead end.
Spengler is channeled by David P Goldman. Comment on this article in
Spengler'sExpat bar forum.
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