Financial alternatives for Turkey: Analysis

Financial alternatives for Turkey: Analysis

SONER KİSTAK

Since 1945, the Western financial world, which also includes Turkey, has been governed by Bretton Woods’ system of monetary management. This dollar-centric system is still at work today although there have been some important modifications. To demonstrate this, one has but to look at all the foreign reserve holdings of the world’s central banks as of the third quarter of 2017. Here we can see that 63.5 percent of all holdings are kept in dollars followed by euro at 20 percent.

This dollar hegemony has had several pillars supporting its wide-spread usage, such as: i) the sheer size of the U.S. economy; ii) a strong diplomatic presence of the U.S. in institutions like the International Monetary Fund (IMF) and the World Bank; iii) the U.S.’s mighty military force, and iv) a huge influence on the world’s biggest oil producers which trade in U.S. Among these factors, diplomacy is perhaps the most important one and the previous US administrators were successful in winning the hearts and minds of nations. The Trump administration, however, is rather peculiar. For example, Trump’s latest tweets concerning the tariffs on Turkey can be interpreted as bullying. No country, let alone Turkey, deserves such mistreatment.

This diplomatic standoff demonstrates that in the long run, Turkey needs to diversify its financial partnerships to other countries and institutions as well. While the default option for any emergency financing remains the IMF where the U.S. has the biggest say, there are other possibilities as well. Below, we go over potential financial alternatives and outline their advantages and disadvantages.

The first obvious alternative for this diversification is the EU and its financial institutions, as Turkey has strong commercial and security ties with this bloc. It is in every interest of the EU to have a functioning and stable Turkey. As we have seen in the 2015 immigration crisis, cooperation with Turkey was key in the resolution of the crisis. A possible collaboration program between the European Central Bank and the Central Bank of Turkey could also alleviate some of the pressure on the Turkish banks and their European partners.

Secondly, as can be seen from the table below, in terms of foreign exchange reserves, China tops the list with a solid $3.2 trillion in held reserves. Indeed, China has been a major investor in emerging countries, particularly in Africa. Their pragmatic business approach entices many countries to cooperate with as important a country as theirs.  At the same time, Chinese investment policy has been criticized by Western commentators as dragging countries into “debt traps” citing examples like Sri Lanka and Djibouti to warn emerging countries of Chinese advances. Put differently, any financial dealings with this Asian country should consider Turkey’s long-term sovereignty and security interests.

Thirdly, some Turkish politicians have suggested that Russia might financially back Turkey against attacks at its currency and financial system. While Russia has tremendous natural resources, it is not a country that sits on easily deployable financial reserves. Besides, Russia itself is under intense sanctions. Fourthly, seeking assistance from Gulf countries could have been an option, however the tense political situation in the region and the volatility of oil prices make this an unreliable one. Finally, while Japan can be a potential financing source for Turkey, at least on paper, it is unlikely that they will extend huge support to Turkey due to its close alliance with the U.S.

Overall, the study of different diversification alternatives for Turkey firstly points to Europe and then to China as Turkey’s best options.

Countries With the Most Foreign Currency Reserves as of the end of 2017 (Source: Visual Capitalist)

       ($B)

  1. China                      $3,161.5
  2. Japan                      $1,204.7
  3. Switzerland             $785.7
  4. Saudi Arabia           $486.6
  5. Hong Kong (China) $437.5
  6. India                        $397.2
  7. South Korea            $385.3
  8. Brazil                       $358.3
  9. Russia                     $356.5
  10. Singapore                $279.8

Turkish economy, Turkish Lira, China, Europe