Investors in Turkey appear to have calmed down after their initial negative reaction to the appointment of President Recep Tayyip Erdoğan’s son-in law, Berat Albayrak, as head the finance ministry and treasury.
Last week, Albayrak made statements hinting at economic orthodoxy, saying how the government would ensure harmony between fiscal and monetary policy to bring down Turkey’s inflation rate to single digits from more than 15 percent. He also said that the government would draw up a comprehensive medium-term plan to be announced in the coming days or weeks.
When adding Albayrak’s reported plans for a trip to London to meet with investors, Turkey agnostics have moved to the sidelines, at least for the time being. Though the level of the lira and interest rates demonstrates that investors are far from sold on economic policy under Erdogan’s enhanced presidency.
During these relatively quiet days, it might be prudent to turn to a key set of data, namely Turkey’s “International Investment Position” (IIP).
Turkey’s IIP is significant in that it shows both the external financial assets of its residents, in other words claims on non-residents combined with gold bullion held as reserve assets, and the external financial liabilities of residents to non-residents.
The difference between these total financial assets and total financial liabilities is known as the net IIP, in other words the net position of total claims of Turkish residents on non-residents versus the total liabilities of Turkey to non-residents. A positive NIIP -- assets higher than liabilities – would mean that Turkey would be a net creditor, while a negative NIIP -- liabilities higher than assets – would mean that it was a net debtor country. The measure therefore allows us to see the extent of Turkey’s external financial exposure.
The deficit of $401 billion for May is huge and should get the attention it deserves.
And as of May 2018, Turkey’s assets stood at $231.6 billion compared with $232.7 billion at the end of 2017. Turkey’s liabilities to the rest of the world, on the other hand, fell to $632.5 billion from $691.7 billion during the same period. Thus, Turkey’s NIIP, defined as the difference between Turkey’s external assets and liabilities, was a mouth-watering $400.9 billion, though lower than the end-2017 level of $459.2 billion.
The $58 billion drop should not be mistaken for a sizeable improvement, as it is partly caused by drop in the value of liabilities caused by the lira’s rapid loss of value since the start of the year.
Looking closer at the asset side, at the end of May 2018, reserve assets were $107.3 billion compared with $112 billion in April. Not good news of course.
Other investments decreased bv 3.3 percent from the end of 2017 to $74 billion. Currency and deposits of banks, one of the sub-items of other investments, decreased by 10.8 percent to $31.2 billion during the same period.
In sub-items under liabilities, direct investments at the end of May 2018 were $139.5 billion, a decrease of 26.3 percent versus the end of last year, reflecting changes in market value and foreign exchange rates. Such a significant drop also shows how investors have started to keep away from Turkey.
Portfolio investment decreased by 9.4 percent to $161 billion compared to the end of 2017. Non-residents’ equity holdings dropped 24.7 percent to $39.1 billion. Non-residents’ holdings of GDDS (Government Domestic Debt Securities) slid 20.2 percent to $24.7 billion. Outstanding Eurobond holdings of non-residents, meanwhile, increased 3.8 percent to $46 billion.
Other investments increased 2.1 percent to $332 billion compared to the end of 2017. The foreign exchange deposits of non-residents held in domestic banks rose 3.4 percent to $37.8 billion. Turkish lira deposits grew by 4.3 percent to $13.7 billion. Such moves reflect the rise in interest rates in Turkey.
Total external loan stock of domestic banks decreased by 0.4 percent from the end of last year to $94.4 billion. The total external loan stock of other sectors increased 2.7 percent to $111 billion.
Enough with all the numbers.
The important story lies behind these movements. The first striking thing is that Turkey’s has a deficit to the rest of the world of $401 billion in an environment in which it is getting tougher and tougher for emerging markets to raise external funds. That deficit compares with the total size of the economy of $880 billion.
Such a shortfall reflects how Turkey has based its economic growth on loans from abroad over the course of the past few years, when foreign exchange borrowing was extremely cheap. Now that the lira has weakened significantly – by more than 20 percent during 2018 alone -- it is becoming costlier for Turkey as a whole to find sufficient fresh hard currency to keep the ball rolling.
The decline in reserve assets -- which investors are clearly well aware of looking at the lira’s performance over past months -- should be a warning for the new government. The sizeable $58 billion decline in net IIP provides no relief given the details of how this drop has occurred.
Investments have also been falling constantly, as have liabilities such as the foreign exchange deposits of banks.
The IIP shows that Turkey is having trouble refinancing its foreign exchange obligations and is making use of its own resources. There are still opportunities to raise hard currency but such opportunities are costlier, and of course riskier as economic growth is slowing in Turkey. Narrowing profit margins will soon make financiers more skeptical about the ability of Turkish firms to fulfill their external debt obligations. Moreover, while external financing is shying away from Turkey, the IIP details also tell us that local money is trying to flee the uncertain economic environment, shown in the fact that the $58 billion drop is based on a decline in liabilities and not on an increase in assets.
Thus, the waiting game has already begun.
If Treasury and Finance Minister Albayrak’s talk of orthodoxy in dealing with Turkey’s economic problems it not rapidly turned into action in real life, then there are some very tough days ahead for Turkey.