Hyperinflation, Dollarization and the Giant Growth of the Turkish Economy

Turkish President Recep Tayyip Erdogan has fired three governors of the Turkish Central Bank since mid-2019 and is fighting high interest rates in every possible way, insisting on applying low interest rates to the Turkish economy to boost growth and investment. Its purpose is to avoid a giant tsunami of bankruptcies for both businesses and households, which would cause huge political costs for him.

Trust Economics expects Turkey’s GDP growth to approach 10% by 2021 – which of course the wealth a country produces has nothing to do with the course of its currency.However, currency instability could potentially limit the growth of the economy in the future. This could be achieved through the efforts of legal entities and individuals in Turkey. More specifically:

Increase in foreign currency deposits that will come from the conversion of Turkish pounds, mainly into dollars and euros, to avoid corrosion of their deposits by both Turkish companies and Turkish households. Corrosion of Turkish lira deposits is caused by low interest rates and inflation. Foreign currency deposits already reach $260 billion.

This trend can be realized not only by converting their deposits from Turkish lira to foreign currency, but also by a generalized bank run that will be caused by the movement of mass withdrawals by banks.

In this case, the government will be forced to impose capital controls, mainly on foreign currency deposits. Annual inflation stood at 20% in October 2021 – severely affecting low-income households.Inflation is fueled by imported energy and imported raw materials that are necessary for the development of the Turkish economy. The constant slippage of the currency causes higher prices.

The net foreign exchange reserves of the Central Bank translate into a small possibility of its intervention to support the domestic currency.

The Turkish government is not interested in the currency slipping, as long as there is a stable source of funding from abroad (mainly from the Persian Gulf countries and China) that could fuel growth until the new presidential election. Businesses in Turkey have leveraged their foreign debt by $74 billion by transferring it to the public sector, as the Ministry of Finance began issuing local debt in foreign currency.

Central government debt in foreign currency reached 60% of last month – up from 39% in 2017. Public debt service becomes more expensive unless it is structured in long-term repayment debt securities. Turkey’s debt-to-GDP ratio is very low at 40% of GDP and through growth it can be stabilized, even if the country’s debt increases, allowing the government to increase social benefits to lower income households until the new election.

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Trust Economics is a specialized independent economic research, analysis and consultancy business. Our team provides ingenious analysis in the macro & micro economic field, in the field of financial market, regional and sectoral analysis equally, forecasts, consultancy, specialized studies-research/projects from its headquarters in Athens, Greece.

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