Why is the Turkish Lira rapidly depreciating?
According to the latest round of the World Values Survey, only 11 percent of Turks believe that “most people can be trusted.” In Germany, that number is 45 percent. When it comes to trusting others, Turks are at the bottom of the list. Yet in comparison to others, Turks save less and borrow more. The current account deficit stands testimony to that. So Turks are surrounded by people they don’t trust, but don’t build up financial security around them. Sounds like a recipe for anxiety to me.
Turkey is now planning to save even less in 2017, meaning that it’s due to enlarge its already high current account deficit. This means that the country will be even more reliant on foreign savings. Paradoxical, isn’t it? Most Turkish government policy these days is about countering the myriad of enemies, real or perceived, yet the country is making itself even more vulnerable to outside influence. This at least, is my reading of the new economic Medium Term Program released the other week.
Let’s review the facts. First, Turkey’s domestic savings rate was around 14 percent for the latest year on record. It is around 50 percent in China, 30 percent in Russia, 20 percent in Poland and South Africa, and 17 percent in Brazil. So 14 percent is a low number, even for a developing country, and it is declining. We all know that living on other people’s money makes Turkey more vulnerable, yet we plan to go ahead with it.
Second, as Turkey’s growth has slowed down, its current account deficit has gone up. Turkey’s average annual growth rate has declined from around 7 percent in 2002-2007 to around 3.5 percent in 2008-2015. But at the same time, the current account deficit jumped up from 3.8 to 6.2 percent. The global financial crisis has made Turkey a more vulnerable country.
Third, the government is now planning to lower the public savings rate from 4.4 to 2.7 percent in 2017, and estimating its domestic private savings to rise from 10 to 11.9 percent. This means that the government is planning enlarge its own deficit while expecting its citizens to save more in 2017. One is a government action, so it can be controlled. The other is what you are hoping millions of people to do. That is much harder to control, or even to influence.
The world has become a very volatile place. 2017 should be a year of living more cautiously for everybody. The area of finance is by no means an exception. Certainly, we will see some moves from the U.S. Federal Reserve. We will see many elections and referenda in Europe, probably bearing Brexit-like surprises. In the U.S., the mere idea of a “President Trump,” no matter how unlikely, is a significant risk in itself. And low growth, which is scheduled for next year, tends to bring bad politics to the surface. In this setting, raising the current account deficit even further looks like reckless driving to me.
So is there any wonder why the Turkish Lira has been depreciating rapidly once again this week? Forget about President Erdoğan’s Mosul remarks or the Moody’s downgrade for a minute. Read the Medium Term Program targets. Look at the high-risk strategy of low growth and less savings.
It is bad driving that is pulling the lira down.