Times are difficult, but we can make things right: Analysis

Times are difficult, but we can make things right: Analysis


The current macroeconomic news coverage by the international press paints a very negative picture about our country’s economy. Not only does this cycle of negative thinking not add value, it also risks creating a vicious circle in the minds of the international investors. As the Chinese proverb says, “a crisis is an opportunity in disguise.” In fact, with no significant elections coming its way for the next four years, Turkey has a nice window of opportunity: This election-quiet period might enable our politicians to make the necessary structural reforms that are needed to take our country’s economy to the next level.

Overall, Turkey’s long-term economic objectives and policies are the right ones, however, it is the short-term noise that Turkey needs to overcome. Put differently, if Turkey can get through short-term ill-intentioned speculations, then long-term projects are likely to deliver concrete results and a very solid outcome. In fact, the initial implementation steps of the New Economic Program are encouraging: Turkey’s sovereign Wealth Fund recently injected $3.7 billion into five state-owned banks to prop up the country’s most important banks and to keep credit flowing in this slowing economy. It is now worth looking at some of the long-term and short-term aspects of the program.

In the last decade, state-owned banks have played significant roles in the realization of big infrastructure projects and it is necessary that they be strong enough to continue to do so. As can be seen in the 19th century example of Swiss infrastructure modernization (e.g. railways), such large-scale investments deliver long-term dividends for the country’s citizens. By way of example, Turkey’s new Istanbul Airport is likely to be a long-term revenue generator. The continuation of large initiatives such as these can create employment and help tackle the country’s unemployment problem in line with a Keynesian spirit.

Another long-term policy is to prioritize investment in sectors such as pharmaceuticals, energy, petrochemicals and software. This is a logical step because these high-margin import items account for most of Turkey’s current account deficit. While this measure has “import-substitution” overtones, it also has the aim of modernizing the country’s economy. In sum, Turkey needs to keep its banks in good shape in order to realize these necessary long-term projects and to address its structural gaps.

Apart from these megaprojects, Turkey also needs to take the right measures in terms of managing short-term considerations. One such consideration is to handle the issue of non-performing loans, the sword of Damocles presently hanging over Turkish banks. The non-performing loan (NPL) ratio rose from 2.9 percent in December to 4.04 percent in March. Most of this bad credit comes from the country’s energy industry. In fact, around $50 billion of the outstanding debt comes from unprofitable energy projects of the last decade. Consequently, government plans to carve out non-performing energy and real-estate loans into two funds could improve the situation if well executed. Otherwise, if rushed through, this might lead to fire sales. Overall, recent interest by international investors shows that such a “bad- loan debt disposal plan” can work. Disposing of bad loans at reasonable prices is likely to solidify Turkish banks’ balance sheets.

On a different note, a friendly recommendation for the Turkish state banks is related to their involvements in foreign exchange (FX) operations. It is true that the Turkish Lira is currently under pressure for unjustified reasons, such as international FX speculation, dollarization pressure, and a jittery geopolitical context. Understandably, Turkish state-linked institutions are working to counteract these factors, the objective being to stabilize the currency in line with the macroeconomic goals. As a part of this effort, Turkish state banks are reported to have sold some dollar reserves in the last weeks. Obviously, other state-linked institutions can undertake such FX operations. In fact, it is probably better to not use state-owned banks directly and keep them out of the spotlight to ensure their firm standing and credibility vis-à-vis international parties. This will prevent any unfounded speculation against these important institutions.

In sum, Turkey’s New Economic Program can and will work. But we need to stand shoulder to shoulder, and believe in our country’s economic strength.