Turkey, Argentina and déjà vu
Turkey and Argentina were like economic twins back in the 1980s. They shared many stories about the balance of payments, currency crises, and International Monetary Fund (IMF) conditionality. They later diverged, with Turkey seemingly outperforming its twin. But recent events brought them back into the same fold, and this time, Argentina appears to be in a more advantageous position. Let me explain.
This May was an ominous month for both Argentina and Turkey. The Turkish Lira and the Argentinian Peso depreciated in double digits. The central banks of both countries raised interest rates. In both countries, the culprit is easy to find: Rising current account deficits in the last three years together with a high level of debt, and double-digit negative YTD (year to date) returns in 2018. This is an even more terrible combination considering the world is moving from quantitative easing (QE) to quantitative tightening (QT).
Turkey and Argentina have been caught up in a taper tantrum with all the usual suspects for portfolio managers. The only difference is Argentina’s debt is public, while that of Turkey is overwhelmingly private. Argentina’s situation resembles the Turkey of 2001, while the Turkish situation is very much like Korea in 1997. That makes Argentina’s crisis easier to deal with, if you ask me.
Argentina is scheduled for presidential elections in October 2019, yet the country has taken a risk and has asked the IMF for “exceptional access” to resources. The IMF already had an informal board meeting on May 18 and “demonstrated a willingness to make ‘exceptional access’ to resources available for Argentina to restore market confidence and smooth the adjustment path,” notes Stephanie Segal from the Center for Strategic and International Studies, a prominent think tank in Washington, D.C. At the moment, this has seemed to calm markets down. In comparison, Turkey has so far been unable to provide any horizon to the markets, and the lira is still sliding down with the potential to go further. Why?
I see three reasons. First, Argentinian President Mauricio Macri came to power in 2015 and has a clean slate. He is not necessarily blamed for the fragilities of the Argentinian economy. Second, he already has a program for fiscal discipline, and though too gradual, it demonstrates that Macri understands the problem. Third, the Argentinian president has a close network of friends in the United States, including President Donald Trump himself. Note that the U.S. is the largest and most influential shareholder in the IMF.
Contrast this with the fact that Turkish President Recep Tayyip Erdoğan has been in power since 2002, the country has recently been racing away from fiscal discipline, the Central Bank practically has no independence, and Erdoğan seems to have no friends in D.C. Erdoğan too, had elections scheduled for October 2019, but then had to re-schedule them for this month. Macri, on the other hand, must feel confident he will be better off by late 2019.
Geography also complicates things for Turkey. Argentina has borders with Chile, Brazil, Uruguay, Paraguay and Bolivia. That is definitely more peaceful than Turkey’s neighborhood: Syria, Iraq, Iran, Azerbaijan, Armenia, Georgia, Greece, and Bulgaria, as well as a very active Russian presence on every one of those fronts.
There is also reason to think Turkey’s neighborhood is going to be even less stable in the years to come. This is because many of Turkey’s most combustible neighbors are oil and gas exporters. With advances in biotechnology, nanotechnology, information and communication technologies, there will not be as much of a global demand for petrochemicals. This means structurally lower oil prices. This will disrupt the business models of these oil exporting countries, many of which are rent-distributing fiefdoms rather than nation-states. Their ability to manage such a complex transformation process is highly questionable at best.
There are certainly security factors to consider in Latin America, but Turkey’s neighborhood is different. It is a place where geopolitical factors of the highest order are in play, and need to be factored into economic and social calculations. In the coming decades, our neighborhood will be interesting in all the wrong ways. This could be turned into a very valuable asset for Turkey, if Ankara manages to think about the issue strategically. If not, we too, will continue to become more and more interesting.