Why Turkey Is Not Fixing It's Hyperinflation Problem
all right time to add another country to the list of places i am not allowed to travel this is turkey or turkey because they decided to change their name a few hours before i started recording this video anyway turkey a simply stunning country filled with history culture and some of the most beautiful scenery you have ever seen it's no surprise that up until recently turkey was one of the most popular tourist destinations in the world which went a long way to fueling the massive economic growth the nation experience between the year 2000 and the mid-2010s if i was making this video just five years ago i would be telling the story of an up-and-coming economic powerhouse that could geographically and culturally be the link between the riches of the middle east and the advanced economic systems of europe turkey is the 21st largest economy in the world by gdp and 11th when adjusted for purchasing power parity which is why it's all the more concerning that severe economic and political mismanagement is threatening to unravel all the progress the country has made in the past two decades for those of you who haven't been following the news the country is currently experiencing extremely high levels of inflation which is subjecting the citizens of the nation to almost daily price increases for products that they need to survive the most unfortunate part of this entire ordeal is that it's almost entirely preventable and a few simple measures could put it back on track to prosperity very quickly but unfortunately it looks like the government of the nation is unwilling to take these steps for a few important reasons so why is the value of the turkish lira falling so rapidly all of a sudden what impacts will this inflation have on the country's economy why isn't the turkish government taking the widely suggested steps to alleviate this issue and finally could this be a sign of things to come in our own economies once we have answered all of these questions we can put turkey on the economics explained national leaderboard this episode of economics explained was brought to you by skillshare another year is coming to an end and if you're anything like me you are probably in the process of setting up a new year's resolution which you will give up on the moment it becomes slightly inconvenient the reason i find this happens is because learning new things and then applying that knowledge in a useful way is hard this is where skillshare comes in for those of you who don't already know skillshare is an online library where you can learn pretty much anything and you can learn it from people who are true masters of their craft if your goal for 2022 is to never see the inside of an office ever again and continue the work from home dream then skillshare has an endless library of highly marketable skills which you can do from anywhere in the world with a laptop and an internet connection even if you do like your day job learning new skills is a great way to keep your mind active and sharp the best part is if you use the link in the video description you can gain access to skillshare premium for free for the first month so if your new year's resolution involves learning a new skill of any kind you'd be silly not to give it a go now before we get into the inflation crisis in turkey i need to make the big disclaimer this is an ongoing issue which is changing rapidly every day case in point the country literally decided to change its name as i was writing this script although i'm still going to call it turkey because i'm not entirely convinced that this isn't some kind of elaborate prank anyway this is also a crisis with huge political stakes which means that some announcements and even some economic figures could be more motivated by political power than the pursuit of accuracy but with that out of the way turkey is no stranger to inflation in the 1980s and the 1990s the country experienced inflation rate spikes as high as 140 percent the first spike was caused by the country loading up on foreign debt to fuel rapid growth during the 1970s this caused the economy to effectively overheat while the government ran massive account deficits the idea was the country could just grow its way out of this debt by becoming an export powerhouse which on the surface wasn't the worst idea ever the problem was that the government was borrowing money in foreign currencies which meant that these loans needed to be repaid in the same foreign currencies this dangerous balancing act of living loan to loan came crashing down when oil prices skyrocketed during the mid-1970s at this point turkey was heavily dependent on imported oil to keep its economy going and it was only just keeping its head above water before this price hike the government did its best to counter these issues with stimulus measures but all it really did was devalue the currency and because the nation's debts were primarily denoted in foreign currencies it became harder and harder to repay these loans with domestic money which was worth significantly less every day that passed the country continued to struggle with inflation that hovered around 60 for the next two decades before establishing new mandates from the central bank in the early 2000s before this time the turkish central bank basically did what the government told them to do if the government needed more money to finance infrastructure spending the treasury would call the central bank and it would be more or less as simple as that the reforms of 2001 changed up this status quo significantly the headline issue was that the central bank's core mandate would be on price stability it could also help the government with growth and employment but only if that did not come at the expense of stable prices there are also some other significant changes made such as forbidding the central bank to buy government-issued bonds in primary markets for reference this is how the treasury normally raises money in the united states so banning this exchange was a big deal it meant that if the government wanted to borrow money it needed to borrow it from investors who would likely be a lot more careful about how much they lent out since they didn't have the advantage of being able to print more money if it never comes back to them these reforms sent a message that turkey was going to be on its best behaviour no more double-digit inflation no more defaults after gaining this autonomy the central bank went to work jacking up interest rates to as high as a hundred percent for a brief period in an attempt to stabilize inflation this also cut down on the amount of new cash been introduced into the economy and simultaneously made turkey somewhere that people wouldn't mind putting their money unfortunately there is not much a central bank can do to put the inflation genie back into the bottle once it's out decades of double-digit inflation meant that the lira's face value was extremely low this by itself isn't normally a huge problem the japanese yen for example is still a perfectly acceptable currency even though one yen is worth less than one percent of one american dollar it's just that in turkey's case the difference was too severe it made it difficult to transact internationally it also gave the currency somewhat of a negative stigma if someone hands you a 10 million note you are instinctively not gonna take it very seriously to solve this issue turkey released the new lira in 2005 which was exchangeable for the old lira at a rate of 1 to 1 million respectively this new monetary stability alongside relative political stability was what allowed the nation to grow so rapidly in the past two decades turkey does not have huge reserves of oil or gas it does have some oil fields but they are small and don't even meet the demand of the country itself as such turkey is a net importer of fossil fuels while this means that the country misses out on easy oil riches we have seen time and time again that this can actually be a blessing in disguise it removes the temptation to just become an oil state it also means that turkey's growth was built upon more sustainable industries that added value beyond pumping or digging stuff out of the ground turkey is part of a customs union with the eu which has meant that it has been able to trade freely and receive investment from countries within europe because of this it has built at a strong industrial base in a short amount of time it has a surprisingly large automotive industry where it's able to combine its comparatively cheap yet highly skilled workforce with its geographic proximity to major markets in the middle east and europe it has also up until recently been a major tourist hotspot in 2019 it welcomed 51 million international tourists which puts it ahead of places like mexico thailand germany and even the uk tourism is a fantastic industry because it literally amounts to people flying into a country spending piles of money and then flying out again it doesn't rely on depletable resources and it doesn't even require trade deals it's easy to see why turkey was such a popular destination too it has amazing historical sites breathtaking natural beauty good travel infrastructure and it's relatively affordable it's also a popular way for western tourists to experience middle eastern culture and customs without stepping too far outside of their comfort zone or too far into regions that are perceived to be dangerous whether that perception be true or not so turkey had a lot going for it a great geographic position developing industrial and tourism sectors all backed up by a self-governing currency that was seemingly under careful control the government had also overseen this growth while doing a very good job of avoiding debt whether it be through fiscal discipline or whether it be through self-imposed borrowing restrictions that placed on itself turkish national debt has stayed well below 50 of gdp since the early 2000s so where did this all go wrong the current issues of the nation is facing really got started around five years ago in 2014 risa bertowan was elected president running on a platform of conservative populism he is also shown to be a supporter of the ideals of islamic finance a brief rundown of this system is that typical interest-bearing assets are forbidden because they are deemed by the faith as usury to kind of skirt around these rules islamic banks will set up savings accounts where depositors share in the profits of the bank and borrowers will rent to own the assets that they buy if you wanted a mortgage for example the bank would buy the house that you're interested in and then you would rent it from them at an inflated rental price for 30 years until one day the bank would agree to just give you the house some say this is just interest by another name some say this is a very important way to make sure interest recipients have a shared interest in the underlying asset i'll leave that one up to the comments section to work out for now the details aren't important and all you need to take away from this is that interest is bad in the eyes of turkey's president this has become important because starting in 2017 turkey discovered that it might have a bit of a problem on its hands while government borrowing has been very modest the private sector has been taking on more and more debt to capitalize on the rapid growth of the nation all the new industries that we just looked at needed to be financed but the new highly regulated central bank was very tight-fisted with its new currency this led many large institutions to simply borrow money from countries like germany and the uk which had the added benefit of attracting much lower interest rates like all highly leveraged positions the good times in turkey were great this private sector borrowing created tremendous wealth very quickly but like all highly leveraged positions the bad times are terrible these issues came to a head in 2016 when turkey's bid to upgrade itself from a trading partner of the eu to a fully fledged eu member state was overwhelmingly knocked back primarily due to human rights concerns centered around the country's new president this made foreign financial institutions think twice before lending money and tourists think twice before planning a holiday as these revenue sources dried up a lot of private companies started closing because they were unable to meet their debt obligations this was made worse by the lira's price dropping drastically making the loans denoted in foreign currency comparatively more expensive the government's solution to this was to raise interest rates and introduce austerity measures to get their currency back on track and this worked but at great cost the unemployment rate in the nation skyrocketed to 14 which was the highest it had been since the introduction of the new currency these heightened interest rates did help the large companies trying to pay back their foreign debts it did this by making the lira more valuable in foreign exchange markets meaning the foreign currency debts were comparatively less expensive but it also hurt the average turk who now had to compete in the hardest job market of their professional careers erdogan won his election on a populist platform and many saw this interest rate increase in 2018 as a way to save large debt riddle companies by sacrificing the common man this issue came back with a vengeance in 2020 as the companies that survived the first debt crisis we're now facing the economic implications of the coronavirus remember turkey is heavily dependent on heavy manufacturing and tourism two industries which have been almost put on hold in the past two years once again companies were trying to service their foreign debts which was driving down the value of the currency in foreign exchange markets the central bank initially raised interest rates in an attempt to keep this currency devaluation under control but president erdogan had other ideas he has told the central bank to lower interest rates and has fired a series of central bank chairmen for failing to do so he is convinced that a less valuable era in foreign exchange markets is actually a good thing because he will artificially make turkish exports more competitive as they recover from the impacts of global lockdowns this isn't actually a totally illogical train of thought many countries most prominently china have played an active role in devaluing their own currencies because they know it makes their goods cheaper in foreign markets the problem is that turkey also relies heavily on imports for things like fuel food and fertilizer the currency devaluation has meant that many small businesses and farms are simply not able to afford import goods that they need to keep their businesses going the unfortunate irony is that wealthy institutions have access to financial instruments like futures to mitigate risk exposure to currency fluctuations wealthy turks with savings have also moved their cash into american dollars or euros further accelerating the decline of the lira's price this meant that once again it is the working class and small businesses that are feeling most of the pain of this latest crisis so if this strategy is clearly not working why not just raise the interest rates again well there is probably a bit of political motivation to this remember turkey may have a secularist constitution but its leader is still a strong believer in islam and islamic finance so interest is bad raising interest rates would also look like admitting defeat at this point since the government has pushed the idea that the country can grow its way out of this issue rather than resorting to austerity like it did in 2018 the real shame amongst all of this is that it's totally unnecessary turkey has a very solid foundation it's got a good workforce of young and highly skilled citizens it's not over a line on one industry and during periods of stability it has demonstrated a clear ability to grow rapidly but all of the poor decisions that led to where it is now are likely going to look insignificant compared to a new plan the government just unveiled turkish banks are well aware of the hesitancy of their customers to have savings in turkish lira even with incredibly high interest rates on offer most people just don't trust the stability of the currency it's important to remember that while inflation has improved in the past two decades it's still hovering around eight percent for comparison a lot of economists are freaking out about the idea that the us could experience a six percent inflation rate over the next two years it's because of this that most turkish banks offer us dollar accounts for people to save their money this is how most of the wealthy people that we mentioned earlier exchange their money away from the lira the deposits in these accounts do not attract the sky-high interest rates of the lira-based accounts but for most wealthy turks that's a sacrifice they are willing to make for the relative stability of the dollar the problem this causes is that over time people will just start to use american dollars exclusively meaning that turkey will lose its monetary autonomy for some small countries this is fine for example monaco is not part of the eu but it still uses the euro the autonomy such a small country would get from minting its own currency is just not worth the cost involved in doing it and getting it recognized for a country like turkey however this would be very bad news it would not be able to set its own interest rates and would therefore lose a significant amount of control over economic growth and employment a country with ambitions of being in the global top 10 is going to need its own currency to combat this dollarization the government has announced plans to introduce a new type of savings account which will protect borrowers from headline inflation the account would work like this any money deposited into the account will attract the central bank's cash rate at this point 14 and then at the end of a fixed period the turkish treasury will pay out an additional amount equal to the value lost due to inflation if for example you deposit a thousand lira for 12 months you would receive 140 lira in interest over those 12 months assuming this is only compounded annually for simplicity's sake if the value of the lira halved in that time then the treasury would award you an additional 1 000 lira so that the value of your holdings relative to the american dollar remains the same it's unusual but desperate times call for desperate measures on the surface this looks to be a pretty inspired idea the government guarantee effectively amounts to a higher interest rate without needing to call it a higher interest rate in our example from earlier you would be able to achieve the same thing by offering a 114 apr on savings but if you just call it a government guarantee instead then you don't need to look at big scary numbers besides the marketing spin this could also encourage many turks to trade in their american dollars which generate little to no interest for inflation guaranteed lira which offer a 14 interest rate this trading should push up the value of the lira in foreign exchange markets making regular imports more affordable once again initially it kind of looks like this has worked the value of the turkish lira jumped over 50 following the announcement of these new accounts but that's about where the good news ends a few skeptical journalists pointed out that this increase in the value of the turkish lira coincided with a significant drop in turkey's foreign currency reserves what this might suggest is that the government bought up its own currency in an attempt to make it look like this policy decision had more of an impact on public perception than it really did of course this development is still unfolding so it's hard to say for certain that this is what's happened but it's also very difficult to see an alternative explanation anyway the world's most expensive publicity stunt is really not the big issue here what is the problem is the debt burden this could expose the country to let's suppose that turkish citizens do take up this offer on mass and then the lira continues to fall due to monetary mismanagement the treasury could be on the hook to pay hundreds of billions of dollars this would force the government to do one of two things the first option would be just to default on this promise to top up bank accounts in line with inflation this would obviously be extremely politically unpopular so the government would probably go with option two which is breaking the rule of not directly borrowing money from the turkish central bank there is no other way that the government could get access to enough cash to cover this promise in the event that people do actually take up the offer and inflation continues at its current rate the government has exposed itself to a significant potential liability here which could quickly turn the current situation which is a serious but easily treatable problem into something that could push turkey towards a fate like argentina or venezuela if i was making this video five years ago i would be telling a very different story about turkey if i was making videos five years ago i would have told a very different story about venezuela okay now it's time to put turkey on the economics explained national leader board starting with size turkey is one of the largest economies in the world which is part of the reason why it's getting so much attention in the news a gdp of 720 billion dollars in 2020 means it gets a 7 out of 10. gdp per capita is about what you'd expect for a developing country facing the issues that we've explored in this video it's down from a peak of twelve thousand six hundred dollars in 2013 to eight and a half thousand dollars today it gets a five out of ten stability and confidence well what is there to say even over the past two decades of relatively controlled inflation and strong growth the country is not what you would call a safe haven political tensions and a perceived inability to manage a crisis means that most institutions want as little to do with turkey as they can possibly manage it gets a 2 out of 10. growth is also poor i might sound like a broken record at this point but if i was making this video 5 years ago i would have given the country a 10 out of 10 as the economy had more than quadrupled in size since the year 2000. unfortunately it's 2021 and we measure growth over the past 10 years turkey is down from where it was in 2011 so it gets a 0 out of 10. finally industry this is the real tragedy here because turkey is fundamentally a solid economy there is no reason that turkey couldn't be a wildly successful trading power in the region it has a healthy and diverse industrial sector but unfortunately these industries have been the victim of poor macro management so for now it gets a five out of ten altogether this gives turkey an average score of 3.8 out of 10. yeah well we all knew this one wasn't going to be good but you know what is good learning a new skill in the new year with skillshare thanks again to skillshare for making this video possible if you're feeling stressed out after another trying year why don't you try immersing yourself in the laid-back aussie way of life by taking my course on mastering the australian accent if you are after a skill that you're more likely to use outside of impressing your mates at a barbecue then skillshare has you covered with everything from coding to video editing our modern economy rewards people that bring a unique combination of skills to the table and you never know when coding video editing or cinematography might combine with your core expertise to give you a leg up over your competitor if you would have told me five years ago that i would be combining my economics degree with media production i probably would have laughed at you but here i am you'll never regret learning how to do something new so whether it gets you a new job or just gets you a few laughs be sure to check out what is on offer at skillshare the best part is if you sign up in the link on screen or in the video description below you can get 30 days of skillshare premium completely free thanks for watching mate bye
2022-01-17 20:43
