Blog Post

AEIdeas

One has to wonder what it will take for Erdogan, Turkey’s president, to recognize that his country has a major investor confidence problem that needs to be addressed immediately if his country is not to succumb to the deepest of economic recessions. One also has to wonder how long it will take him to realize that his country has little realistic option but to approach the International Monetary Fund (IMF) for assistance to restore investor confidence.

At a time that the Turkish lira loses almost 20 percent of its value in a single day and over 40 percent in the year to date, Mr. Erdogan responds by asking his followers not to forget that “if they have their dollars, we have our people and our God.” At a time that Turkish bond yields soar to well above 20 percent, Mr. Erdogan responds not by mending his country’s wayward economic policies but by imploring his countrymen “to take their dollars, euros, or gold from under the pillow, and convert them at their banks.”

A basic point that Mr. Erdogan fails to recognize is that Turkey is in its present sorry economic state not as a result of an economic war being waged against his country. Rather, it is the result of his government’s having allowed the Turkish economy to overheat for a number of years. That overheating has been reflected in both a widening in the country’s external current account deficit to more than 5 percent of GDP and to an acceleration in inflation to more than 15 percent.

Further compounding Turkey’s external vulnerability has been its government’s inaction in reining in external borrowing by its corporate sector, which now has more than US $300 billion in US dollar denominated debt. This has resulted in a situation where not only does Turkey have to finance a 5 percent of GDP current account deficit but it also has to roll over more than 20 percent of GDP in short term external debt.

Much as it might be odious to Mr. Erdogan, the sad truth of the matter is that his country desperately needs foreign financing if it is to stay afloat and to avoid a banking sector meltdown. He is also unlikely to be pleased by the fact that such external financing is very much more difficult to obtain now that the world’s main central banks are no longer printing money in the expansive way that they had done before.

Seemingly blind to his country’s desperate need for foreign financing, Mr. Erdogan appears to have gone out of his way to undermine investor confidence in his government. He has done so by raising serious questions about the central bank’s independence and by his repeated assertions that high interest rates cause rather than cure inflation. He has also done so by appointing his unqualified son-in-law to be Turkey’s finance minister and by refusing to consider the scaling back of ambitious public spending projects in the midst of a financial market meltdown.

Experience teaches that once a government loses investor confidence that confidence becomes very difficult to restore. That is why it would appear that Mr. Erdogan has little realistic alternative but to turn to the IMF if Turkey is to stabilize its currency and its financial markets.

By providing an outside seal of approval for a credible economic adjustment program and by requiring concrete and upfront policy adjustment measures, the IMF can help quickly restore investor confidence in Turkey in a way that verbal assurances by Mr. Erdogan at this late stage in the game cannot.

Approaching the IMF will be far from easy for Mr. Erdogan. Not only will he have to effectively admit how misguided his economic policies have been to date; he will also first have to mend fences with the United States, the IMF’s largest shareholder which has an effective veto on an IMF program for Turkey.

Sadly, Turkey’s economic crisis might very well have to deepen before Mr. Erdogan comes around to the view that the IMF is Turkey’s last hope for economic salvation.