Plunging Turkish Lira, early elections
President Recep Tayyip Erdoğan surprised everyone this week by rushing Turkey into early elections on June 24. Why this rush? I think the unbearable and uncontrollable plunge of the Turkish Lira is the major culprit.
First, the weakness of the lira is unbearable considering the huge foreign exchange debt held by Turkey’s private sector. That has the potential to raise corporate arrears very swiftly, which is detrimental to the banking system. It is very easy to move from insolvency to illiquidity once that process starts.
Second, it is uncontrollable due to the election cycle. I often remember former President Turgut Özal’s candid remark regarding the special dynamics of election cycles: “Do I look so stupid that I would raise prices just before elections?” Price hikes don’t make for happy voters. Campaign season is no time for the structural reforms and fiscal measures needed to calm the markets. It was not back in the 1990s, and it is not today - neither in Western democracies nor in Turkey.
That puts Turkey in a bit of a dilemma. The world has recently moved from quantitative easing (QE) to quantitative tightening (QT). If QE was about too much money chasing too few bonds, QT is just the opposite. This is a period with less liquidity and more intense competition for funds. That is bad for Turkey in general, as a wide savings deficit is a persistent feature of the Turkish economy. Yet due to this election, domestic easing will continue. Domestic easing in a global QT environment makes Turkey more vulnerable to external shocks. High growth in 2017 with too much domestic easing has already started to humble the Turkish Lira.
Turkey has always had a savings deficit. The current account deficit has always been with us. Domestic easing means more of the deficit will be funded by foreign savings. But that is what made Turkey vulnerable in the first place. This is why the lira is now plunging again. The overheating of the economy in 2017 is now taking its toll. Continuing this domestic easing in this global QT environment until November 2019 - which was the original scheduled date for elections - would have been too much of a risk. It would not have left enough time to reform the economy and would have meant a too long period to sustain the unsustainable. Add to this the rising nervousness of domestic investors and it is all terrible for politics.
I feel like “an optimist with a lot of worries,” as Madelaine Allbright said recently in an interview with the Daily Beast. Let me start with optimism. There are two types of countries in this region: Countries where we know the results of elections are known before the election date and those where you know the election results only after the elections. Just think about elections in Russia, where Putin was elected with more than 75 percent of the vote, or Egypt where Sisi was elected with 97.8 percent. These countries belong to the first category. Despite everything, Turkey is still in the second camp where ballot box still means something.
But people are worried. This rush to the polls under the state of emergency-a-la Turca should raise concerns. Emergency rule has badly weakened the Turkish judiciary. Judges are key to ensuring the fairness of elections and that will be especially true in June. The fairness of the election is now itself important for the short and medium term stability of the Turkish economy.