Scenarios and Prospects…

Last week, I made an assessment for the business world about the possible side effects of the tensions between Russia and Ukraine on Turkey. Here’s a brief summary of this assessment:

According to an analysis by Dr. Can Fuat Gürlesel in early April, we have three possible scenarios. The first one is a truce between Russia and Ukraine, followed by a peace treaty, and ultimately the gradual withdrawal of the Russians from Ukraine. If such a thing had happened, there would not have been a major change in global economic growth and the year would have ended with a growth rate of 3.5%.

Sadly, now the second scenario is about to become a reality, which means the invasion and conflicts will not come to an end soon, the global growth will be something between 2.5 and 3%, world trade will decline by half a trillion dollars, which is almost as much as China’s exports to the United States. In brief, global trade, which is normally projected to be $23 trillion, will drop to $22.5 trillion.

The third scenario is obviously worse, according to which Russians will continue to occupy Ukraine and a new cold war period will begin. If such a tragedy happens, world trade may decline by 1.5 or 2 trillion dollars. This means that the global growth will be around 1% or 2%, indicating that the world will be facing economically challenging times.

Now, let’s take a quick look at the situation in Turkey: our country imports natural gas and oil from Russia, Azerbaijan, and Iran. At last year’s prices, Turkey’s energy bill is around 55 billion dollars, and it looks like it will surpass $100 billion. Also, due to the fact that we need to import agricultural products, raw materials, and intermediate goods, we will see our current account deficit go up while economic growth slows down.

“Moving On A Fragile Balance…”

It looks like we have our hands tied under the measures taken against the rapid rise in exchange rates in December last year. For example, freeing up exchange rates in order to discourage imports would create a huge burden on the Treasury due to the presence of the foreign exchange-protected deposits. This is, therefore, not an option.  Besides, since releasing exchange rates will have a direct impact on inflation, such an option will not be used either considering the upcoming elections.

Turkey’s export performance continues to increase; however, the unit value of our exports is quite below the imports’ unit value, which results in the fact that even though Turkish exports hit record high levels, they do not provide a significantly positive contribution to the current account balance.

This being the case, we will all see inflation remain at very high levels, between 45 and 60 percent, until the end of the year. In the meantime, the Government will quite probably try to prevent a further increase in exchange rates and in inflation by selling foreign currency from the reserves, which are created by swaps. Financing public deficits through money creation or domestic borrowing can only be sustained temporarily. Therefore, I would like to caution that Turkish economy is merely one step away from hyperinflation.

Turkey’s economy officials look like they have made a choice. They would either give up the growth or the fight against inflation. Apparently, they are focusing on growth rather than combatting inflation. I’m assuming that they must prefer that citizens or organisations go to cast their votes with some money in their pockets, even if this money is generated through cheap financing. 

Even if the Russia-Ukraine war ends today, supply chain disruptions and other problems will continue for a while, and we will have to wait until the end of 2023 for inflation to go down both in Turkey and in the world.

Considering the current state of economic affairs in Turkey, I predict that the economy officials will continue to finance the markets and the government itself through foreign currency sales from reserves, spending from the Treasury to finance foreign exchange losses, also by borrowing and creating money, at least until the elections. Needless to say, no matter what is and will be done, Turkish economy will continue on a fragile path.