At every national broadcast program I attended last week, I insistently underlined that Turkey must largely focus on long-term lobbying. Then I added: “USD/TRY would have already hit 5.5. If it doesn’t, it means that people still believe that this insane period of tensions will be over soon”. I think investors chose to avoid taking careless actions knowing that Turkey-US ties are founded on a century-old friendship thus common sense will prevail sooner rather than later.
But, suddenly, all hell broke loose and USD/TRY hit 5.5 and above ! Again, we found ourselves swimming in unfamiliar waters. Exchange rates sharply fluctuate and then calm down. That’s the nature of floating rate regimes. But, it would not be very realistic to expect USD/TRY to remain calm for long unless the conflicts are solved through diplomacy.
I warned the officials in Ankara, “We have to mobilize all our forces to prevent Trump from getting re-elected”. We have to see that the US is evolving into whole another direction and in the process, diplomacy will play a key role compared to economic actions.
The New Economic Model will be released at 10.00am today. But, I first need to warn you about the future before engaging into making plans about the future. Below, you will see my warnings will fall under three main headings. Those who are interested in the economy will surely read it, but I would like very much that those who are already involved in the economy read it as well.
Exchange Rate Regime, Central Bank and Liquidity:
There are great speculations that the exchange rate regime will get tighter. Somebody must declare, “No, it won’t!” as immediate as possible. We are also in urgent need of foreign funds. Therefore, we expect the Economy Administration to adopt a calmer tone in its statements and promise that the liberal system will never be abandoned. As the diplomacy sits at the centre of discussions, government officials are urgently expected to quit making confusing statements on interest-exchange rates and capital movements. By the way, if Foreign Currency Selling and Buying keeps continuing as representative transactions, Government should avoid imposing any limitations or additional tax on foreign exchange purchase/sell transactions. Any increase in foreign exchange transactions would largely help exchange rates to further calm down. Imposing limitations or restrictions needs to be avoided as they may lead to adverse effects. Surely, individual currency investment may be regulated in the medium-term. Although, at first, markets would react to such action, foreign currency purchase/sell from/to the US and EU would be carried out in specific amounts under specific conditions. Thus, everyday citizen would speculate on exchange rates not based on what they hear from the street but through intermediary institutions. I think it would be quite beneficial for all to implement a medium-term regulation. But, let’s never ever ask CBRT to intervene! Any intervention by the CBRT may result in disaster since its net foreign exchange reserves is less than 30 billion dollars. Accordingly, Central Bank should keep doing what it has always done: take actions to ease Banks. By the way, I must mention that we should keep our cool when it comes to interest rates as well. Although there is a big majority asking CBRT to increase the cost of funding to 20%, I should warn you that it would just be nothing but a temporary solution. However, it may be unavoidable. As the Central Bank keeps taking tighter monetary measures, interest rates are further climbing up along with exchange rates. CBRT should put liquidity on the market very carefully in sufficient quantities. Otherwise, both interest rates and exchange rate may climb up drastically as they did during the 2001 financial crisis.
Public Expenditure and Public Diplomacy:
Government urgently needs to start saving. We are dependent on foreign funds since private savings remain insufficient. But, we spend foreign funds on low-value added activities with long-term outcomes. That is the reason why Turkey is struggling to create value-added. Accordingly, we need to make the prestige projects our priority. Extensive municipal spending and borrowing must be monitored closely while the Government should urgently and absolutely start a strong public diplomacy action hand in hand with the private sector. The global perception of Turkey must be improved in collaboration with banks, and nationwide and worldwide known influencers. Currently, the Government is being harshly criticised for picking up the wrong economic model. It looks like statements and press releases only by the Ministers remain inadequate to properly promote the new model. Private sector representatives should also contribute as much as they can. The Union of Chambers and Commodity Exchanges of Turkey (TOBB) and Turkish Exporters’ Assembly (TİM) are two key organisations, however, but their influence is limited. Initiatives founded by the Private Sector also need to be mobilized. I strongly believe that the Banks of Association of Turkey, which has been very for quite some time, would lend a helping hand in this matter. Additionally, we need a team of competent economists to promote Turkey and its new economic model to powerful financial centres in the world. This team must comprise members, preferably the authors of international economic publications, with perfect language skills, power to persuade and ability to treat others in an unbiased fashion.
Urgent Measures regarding Loans:
Consumer debt restructuring must be urgently put into effect. An effective interest rate ceiling must be set up. And this ceiling shall apply to all persons, including the ones who are dealing with administrative as well as legal proceedings for debt recovery; because everyday citizens avoid paying their debts, instead they are saving foreign currency. Government should at least give people a reason to convert their foreign currency into TRY. As for the Private Sector, a brand new CGF is a must. Funds to be obtained through Domestic Borrowing should be used as a support for public and privates banks’ “Convert your foreign currency debt into lira” campaign in order to help markets be freed of the pressure exerted by those owning foreign currency debt. The Government should launch a program to prevent Financial Institutions from facing exchange rate losses, just like the US did in 2008 with its Troubled Asset Relief Program (TARP) which was designed to purchase toxic assets and equity from financial institutions to strengthen its financial sector. Providing banks with support so as to help them be a part of this program, against prespecified collateral obviously, would be a revolutionary step forward. In short, in addition to urgent measures for alleviating some of the market pressure caused by foreign currency debtors, Turkish economy urgently needs strong implementations to prevent TRY debtors from piling up foreign currency whereas they should be paying their debts. Providing individuals and institutions with alternative payment methods would help take the pressure off the financial system.