In the dollar Turks trust
I was very surprised the other day when asked whether Turkey would “clam up” economically in 2018, meaning whether it would close in on itself. To give a bit of a background, Turkey started to open up with Turgul Özal’s reforms in the 1980s, and the process reached its apex in 1989, with the total liberalization of capital account. Ever since, “opening up” to Turks is synonymous with getting freer and richer. “Clamming up” would be the opposite. Let me be very clear: Economically, this is unthinkable. Politically, it would be a suicide. Why?
Have a look at the Turkish banking sector’s balance sheets. As of today, around 43 percent of all commercial bank deposits are in foreign currency (FX). More than half being in U.S. dollars, Turkey is once again a highly dollarized economy. So despite the rising and acute deficit in trust between the American and Turkish governments, our trust in the U.S. dollar has not wavered a bit.
The volume of FX bank accounts move in line with our trust in domestic economic policies. The share of FX bank deposits was around 45 percent in 2001. Then it declined to 35 percent in 2007. Now it is rising again. Why? Because the inflation rate was at around 53 percent in 2001, then declined to around 6 percent in 2007. Now the inflation rate has increased by around 30 percent, reaching double-digit levels once again.
Less trust in domestic economic policies means less confidence in the Turkish Lira. More trust in the U.S. dollar as a store of value leads to a rising share of FX bank deposits in total deposits. Public sentiment regarding domestic economic policies always leads to these kinds of portfolio shifts. So “bad economic policy” means a flight from the lira, usually to the dollar. “Good economy policy” in the public eye leads to the reverse. It’s like a barometer.
Here we are seeing it again. Turks do not trust the lira as a store of value, and they flock to the U.S. dollar. Turks are paying 228 percent more to get a U.S. dollar than they were on average between 2007 and 2017. Why? Partly because the U.S. dollar is stronger everywhere now in 2017 when compared to 2007. But it also reflects a kind of a daily vote of confidence on the soundness of domestic economic policies. That’s what I call freedom. We have had this freedom more or less since 1989, and we are happy with it.
Turks prefer U.S. dollars or euros in their retail FX accounts, not Russian rubles or Iranian riyals. At the end of the day, it’s all about freedom of movement, moving toward more secure assets when needed. Are you going to be able to take care of your family? Will you be able to hold on to your business? The system that former President Turgut Özal and others set up in Turkey gives citizens the freedom to choose their financial security provider. So the institutions of the Turkish Republic are merely competing in a marketplace to provide individuals that security. That’s what I call freedom. That’s what increased per capita GDP of Turkey from $2,000 in 1989 to $11,000 today despite all odds. No one can dare to take that feeling of security away.
