OUTLOOK 2021 Turkey

OUTLOOK 2021 Turkey
Biden meeting Erdogan during his days as US vice president. The former has referred to the latter as an "autocrat".
By Akin Nazli in Belgrade January 4, 2021

2020 goes down as a globally exceptional year, a rare thing. Nobody could have predicted such a massive virus outbreak would strike when it did, although there were little heard voices warning that humankind’s incursions into nature were pushing up the chances of a pandemic. Among its myriad impacts, the outbreak changed expectations on the chances of a snap election in Turkey, while it must have swung plenty of votes that won Joe Biden the White House.

“I’m willing to bet that this time last year nobody (including us) was forecasting that a pandemic would rip through the world in 2020, causing the biggest fall in global GDP since World War Two,” Neil Shearing of Capital Economics wrote on December 7 in a note on “What to expect in 2021.”

“What’s more, I’m willing to bet that anybody that did forecast such an event, failed also to forecast that stock markets would end the year at a record high,” he added.

The pandemic serves as a useful reminder of Keynes’ principle of fundamental uncertainty as some things are simply unknowable before they happen, according to Shearing.

So, perhaps, we should not easily buy the recovery in the “real economy” story for 2021. We are familiar with outlooks brimming with positivity at the beginning of a new year, but we should not forget that those who produce these dominant discourses are typically those that also drive global liquidity in the financial markets.

In November 2020, the music changed in the US. Biden, despite the wailing and the flailing from Donald Trump, won a mandate, and the policies of his administration will be the main determinant as to what will eventuate in Turkey in 2021.

It all hinges on Biden

Our Outlook 2020 Turkey report read: “Unless the Democrats get their act together, November 2020 could deliver a Trump landslide…”

Although the Democrats proved by nominating Biden the inadequacy and lack of imagination of the US establishment when it comes to meeting present-day challenges, the day came when (to use a little licence before the history and science books settle on exactly what occurred) a Chinese peasant in Wuhan contracted a virus by eating a bat or a pangolin and, as a result, delivered a pause in the destruction of the prevailing “global” system of economics.

Turkish President Recep Tayyip Erdogan, who in March will enter his 19th year as Turkey’s leader, has in his time worked with two Republican US counterparts and one Democrat occupant of the White House. He knows Biden, of course, from his time as US vice-president under Barack Obama in the eight years before Trump took over in January 2017.

Barring unforeseen events, Biden will become US president on January 20. Biden late last year referred to Erdogan as an “autocrat” and there are those who see him attempting to pull down his Turkish counterpart. But as things stand, it seems more likely that his administration will aim to make use of Erdogan.

Biden was vice president when Erdogan was subcontracted into the Syrian Civil War in 2011. If Erdogan can find a role for himself in the Democrats’ new game plan, he can survive throughout 2021 despite all of his weaknesses.

The sanctions noise and the Halkbank court case—the state lender has been indicted in a Manhattan court for conspiring to evade US sanctions on Iran and the case has links to both Erdogan and his inner circle—will continue to hang over Erdogan’s head while the media will be given the “human rights” and “is Turkey becoming a proxy of Russia/China?” toys to play with. But the perennial story suggesting that Erdogan will be smashed between the irreconcilable demands of the Washington and Moscow seems unlikely to come to pass in 2021 despite Biden in the White House.

The next hearing in the Halkbank case is scheduled for March 1. It seems bound to stay politicised.

Snap polls?

In our OUTLOOK 2020 Turkey report, we also noted that Erdogan’s popularity with voters had fallen below 40% and that he would do all he could to distract the electorate from grinding economic problems.

Across 2020, Erdogan staged political and sometimes armed interventions that created military tensions in the eastern Mediterranean, Libya and Nagorno-Karabakh.

His options in the Syria theatre narrowed but new opportunities for nationalist-infused performances, such as a claim that Turkey had made its first ever major natural gas discovery, in the Black Sea, were found.

However, Erdogan’s incessant attempts at aggressively flexing the muscles of Turkey’s so-called growing and unstoppable importance and greatness as a power holding its own on the world stage has failed to convince the Turks that their president, even despite all the economic pain, is indispensable. Erdogan enters 2021 with his support among voters at below 30%.

As of December 2020, Erdogan seemed to be aiming to stall the increasingly loud calls for an early election while moving to secure support from Biden. However, the dissatisfaction within Erdogan’s governing coalition—the president’s Justice and Development Party (AKP) relies on support from the ultra-nationalist Nationalist Movement Party (MHP) led by Devlet Bahceli, a spewer of baleful rhetoric—is becoming visible with the country—now also enfeebled by an out-of-control coronavirus crisis, the extent of which the Erdogan administration failed to disguise with tactics such as incomplete (to put it kindly) statistics—sinking on all fronts.

So we come back to the Biden administration. It appears to be Erdogan’s sole hope and if Biden accepts the task of rescuing the “autocrat” all other problems plaguing the Ankara palace could be managed. But if Erdogan cannot find a way to obtain strong backing from Biden, 2021 could see the collapse of Turkey’s governing edifice.

In such a case, Erdogan will resort to whatever means he has at hand, just as he burnt the country after he lost his parliamentary majority in the June 2015 elections—but he would lose in a snap poll.

By February or March, it should be clearer whether Erdogan has Biden’s support or not.

Turkey’s conflict with the Kurds, Erdogan’s relations with the jihadists he has struck cooperation deals with in Syria, the chance of the country shifting back to being a parliamentary republic (and doing away with the presidential republic status that has made Erdogan the nearly all-powerful “executive president” with no prime minister in the picture) and changing alliances in the political coalitions will be other closely observed matters.

The trick will be to look for real developments amid all the noise generated in and by the media. There is an awful lot of political noise in Turkey, just as there is a terrible amount of high-minded talk on the country from the EU. But talk is all that it remains.


How many packages of baby formula food does the minimum wage buy per country. The figures are given in the right-side column. The countries listed in the left-side column are the UK, Switzerland, Germany, Ireland, Austria, the US and Turkey. (Source: Turkish daily Sozcu).

Baby formula food packets in supermarkets in Erdogan's Turkey are no longer attached to alarms. Shop managers have decided it is far better to lock them in glass safes.

Worth pondering is how Turkish babies are dependent on imports and the external financing of their economy.

Poverty levels in Turkey are deepening. It is an inescapable fact and it is the reason why Erdogan would lose any upcoming election.

The unemployment disaster in the country is getting worse. Youth unemployment in particular has created a big new marginalised social class. Erdogan’s popularity ratings with young people in Turkey are abysmal.

The fresh loan flow, or lira supply, has turned negative following ultra-strong growth. Millions in Turkey faced harsh poverty even during that growth, while loans were spent on buying gold, FX, real estate and so forth by the more fortunate. With the loan flow cut, how long is the harder reality sustainable?

End of the virus?

Much of the year has been drowned out by the huge noise caused by the coronavirus (COVID-19) pandemic. When the virus spread around the world in the early months of 2020, there were those selling the story that it would end before it even got going.

Now, there is the vaccine story.

There is simply not enough acuity in the global media to deliver reliable coverage of such a huge health and economic emergency. Even Turkey won praise for how it tackled its Covid outbreak at the beginning. A few publications (trumpet blow) were serving warnings all along that its virus case statistics did not stand up to scrutiny and that the pandemic appeared to be taking a far higher toll on the country than officials were admitting to. So imagine the lack of surprise in certain quarters when officials, under pressure, finally came up with more realistic statistics (though they appear to still fall short of the bleak actuality seen across Turkey) that show Turkey, according to its number of infections, with the seventh biggest outbreak in the world and the worst in the Middle East. Turkey will still not be over the spread of coronavirus by the end of 2021.  

These days, voices in the media are praising Turkey for switching to an “orthodox” economy management team in early November 2020. Let’s see where we go with that. 

GDP: Lives cost nothing, but tourism does

Turks, of whom 40% earn the minimum wage of around $300, face harder times at least in the weeks immediately ahead with continuing COVID-19 lockdowns combining with monetary tightening.

Turkey’s worst potential trouble will eventuate if the situation with the pandemic means the country cannot properly launch its tourism season in April. Losing huge amounts of tourism revenues for a second year would mean a tectonic collapse in the economy.

In our OUTLOOK 2020 Turkey report, we noted that Turkey’s official data series had come to be widely regarded as a bad joke.

This year, we can add that the joke has gotten worse, particularly given the attempt of the Erdogan administration to use flawed statistics to present Turkey as a country with a relatively mild coronavirus outbreak, an attempt that caused intense anger among the Turkish medical profession and which fell to pieces after an opposition politician got his hand on a confidential snapshot of reality.

For another chunk of those flawed statistics, simply switch the “2019” in this argument from last year for “2020”, and the “2020” for “2021”: “It is pretty much certain that the 2019 official growth rate will be posted as slightly above zero… And, if the Erdogan show remains in place, expect 5% in 2020 in line with the president’s aspirations, despite analysts currently suggesting around 3% looks more realistic.”

Forecasts will converge to the order at the statistics institute.

Since 2013, Turkey’s official data has suggested an outlier with a positive growth performance yet its GDP has contracted to below $700bn in 2020 from $958bn in 2013.

The same movie will be playing in theatres across 2021 as long as Erdogan remains in power.

The construction and automotive industries were bailed out again in 2020 with the dumping of cheap loans. More industries, led by tourism and retail, will join the bailout queue in 2021. 


Since 2016, many essentially bankrupt companies in Turkey have been kept afloat with cheap loans. Problem loans currently make up around 15% of Turkish banks’ loan books and the figure is expected to extend into the 20%s in 2021.

Ongoing “regulatory forbearance” and the restructuring of loans hide the real picture, but the banks’ balance sheets, weighed down by non-performing loans (NPLs), are in fact among Turkey’s most serious headaches.

Turkey is currently in the midst of a growing second wave of high stakes debt restructurings. Its banking industry has been subject to non-stop loan restructuring cycles since 2016.

More industries join the restructuring queue with each economic crisis, and the restructuring efforts in effect now take place amid interwoven crisis cycles.

A contrived advantage for the Turkish banking industry is that its financial statements are unaffected by the situation and it can go on releasing huge profits—this is because of the generous “regulatory forbearance” exercised by the Erdogan administration.

The contractors behind giant infrastructure black holes along with energy, construction, tourism, airline and retail companies, along with a great number of small and medium sized enterprises (SMEs) in Turkey, are all found within the debt restructuring spiral.

Inflation: When will the policy rate be cut?

Our Outlook Turkey 2020 report stated“Concerns are still there over whether there will be an overshoot of monetary policy and a renewed depreciation in the currency.”

It was pretty much bound to happen, and it did, very nearly giving Turkey its second full-blown lira crisis within two years.

It is not anticipated that the ongoing monetary tightening process—backed by a further 200bp cut in the benchmark rate to 17% on December 24—will last too long either since all economic actors have since 2016 been simply surviving on bank loans.

Producing that much additional lira via fresh loans fuels the exchange rate.

What we have here is a vicious circle and Turkey will remain caught in its cycle in 2021.

The Turkish Statistical Institute (TUIK, or Turkstat) on December 3 surprised the market by announcing that official annual inflation reached 14.03% y/y in November, compared to forecasts ranging between 12.3% and 13.08% made in a Reuters poll with a median estimate of 12.6%.

Erdogan’s lickspittles now work to the suggestion that “the people” see actual inflation at a minimum 15%, but some mainstream pundits talk of 30% at a minimum.

Following the November inflation release, the earliest chance the officials will have to make the case that inflation has fallen into the single digits will come in May, ceteris paribus and as long as Erdogan, presently pragmatic enough to concede he’ll have to keep eating crow, does not attempt to push his luck.

The May inflation reading will be released on June 3, but Erdogan may launch a rate-cutting process as soon as March.

The central bank has an end-2021 inflation target of 9.4%, just shy of double digits.

‘Goldollarisation’ to continue apace

Turks continue to buy up gold and FX at a disconcerting pace while alarm bells are ringing as regards the FX share in residents' deposits.

Turkish lira deposit rates, still subject to a 5% deposit tax for the most popular maturities of up to three months, remain highly unattractive and can play no role in curbing the ‘goldollarisation’ seen as the only option by so many Turks.

 Public finances: A black hole

Turkey has been claiming increases in its central bank reserves and tax income amid the FX sales by government-run banks and lockdowns applied to the real economy.

Now, there is impudent talk of “reforms” and “fiscal policies that complement monetary policy”.

Such suggestions amount to absolute untruths—there is no need to waste time on these ‘troll’ stories.

If Turkey were to launch a serious process to reverse what is a decade of institutional collapse, it would require at least five years of earnest and sincere efforts to get somewhere.

Restoring the $130bn of international reserves burnt up by the previous economic team led by Erdogan’s son-in-law finance minister Berat Albayrak in an incompetent attempt at defending the lira would require at least 10 years.

Addressing the financial mess and burden created by Turkey’s mass of public private partnership (PPP) projects would also take at least 10 years.

Erdogan need to do no more to prove that he is a destructive, not a constructive, force.

The reform story can only be a story of a post-Erdogan Turkey. The story will not get started amid the banana republic formed under the Erdogan regime. 

Who needs “Canal Istanbul”?

Erdogan has shown that he is actually serious about his $9.8bn vainglorious mega infrastructure plan to construct “Canal Istanbul”,  an alternative shipping route to the Bosporus Strait described by analysts as of little practical use and by environmentalists as an unnecessary threat to nature that could even worsen the commercial capital’s earthquake risk. Parcels of land around the planned project, that will slice through Istanbul, have been sold to some Qataris and members of Erdogan’s inner circle have also bought some plots.

However, Erdogan’s political lifespan will not suffice to witness the implementation of the project and Canal Istanbul looks set to remain as mere fodder for the tabloids throughout 2021. Erdogan’s insistence on the project going ahead will serve as a reminder that his talk of reform is simply voiced to fool people while he cuts deals of no real benefit to most Turks that serve as inflators of his ego and image as a charismatic leader of the people who should not be questioned. Indeed, Ekrem Imamoglu, the opposition politician who is mayor of Istanbul, faces an interior ministry probe for opposing the Canal Istanbul project in adverts.

Indigestible balance of payments

Turkey’s export performance depends on demand conditions in the EU, not on the value of Turkish lira.

Our Outlook Turkey 2020 report read“Given the deteriorating global outlook for 2020, it is expected that export growth will remain limited. Even a contraction may be seen. The EU remains the biggest export market for Turkey, buying around one-half of its exports. Germany is the top buyer within Europe.”

Switch “2020” for “2021” in that argument if you would rather not buy into the recovery story amid Europe’s lockdowns and other coronavirus constraints.

And let’s repeat the exercise: “The government has targeted 5% growth for Turkey in 2020 and no current account deficit. Under the current economic structure, this is not a possible outcome... Growth of 5% may well be announced, but at the same time the official treatment of the balance of payments numbers should be placed squarely under the microscope.”

We can also use the following OUTLOOK 2020 segment by replacing “2020” for “2021”, adding a shift in the source of foreign financing within the parentheses and, lower down, entering “2020” for “2019”: “Under the present conditions, the current account must inevitably deteriorate in 2020. You can fairly anticipate that the financing of the resultant deficit will be conducted through [hot money inflows as far as possible].

“The government and corporates have, meanwhile, retained their ability to raise funds via eurobond sales. This situation is expected to endure in 2020.

“Turkish banks remained net debt payers across 2019 and their willingness to increase their external borrowing exposure in the present economic environment is expected to remain weak in 2020…

“FDI inflows remained weak in 2019 and a radical change is not visible on the 2020 horizon.”

We can add that a significant process of company acquisitions—delayed by the Turkish government since the 2018 lira crash—may be on the cards for 2021 as many of Turkey’s companies are bankrupt while financial and economic conditions are tightening once again.

“External financing needs for 202[1] remain high [too]” but given that Turkey did not default even when it turned its back for a period on the global finance industry in 2020, it can be assumed that external debts will be rolled over in 2021 as well.

Turkey generally sells eurobonds in January, aiming to take a piece of the market as new year investment plans are rolled out.

Subsequent issues from Ankara usually follow in the early months of the year, though there is flush liquidity as things stand, meaning there is no scramble to capitalise on the investment plans.

On December 16, Istanbul mayor Ekrem Imamoglu said that the municipality’s application to the Treasury to sell around €300mn worth of eurobonds was not moving forward. Political factors were suspected. Imamoglu urged officials to approve the application forthwith.

Markets: Too much money around


The world is awash with money and the leading four central banks led by the Fed are expected to print more.

Printing more and more hard currency means the prices of financial assets, including real estate, keep smashing records. Note that this is not standard inflation.

However, the money printing madness has had no impact on the real economy as the finance industry ensures that the new money is kept among already wealthy people, people who are already consuming to the max.

The solution imposed by the finance industry to the shrinking real economy is, as always, pat: governments are to fuel fiscal expenditures.

The focus of the market is right now on the Biden administration’s likely virus package. The virus package discussions will drive the financial markets, at least across the beginning of 2021.



Soon into January it will be clear whether or not the Democrats will have a majority in the Senate. If the voters of the US state of Georgia put a brake on Biden by not providing the Democrats with the two election runoff seats they need to take control of the Senate, the Republicans will keep their narrow majority and that may trigger a global market shake-up following the new year rally.

In any case, all financial asset prices are fit to burst right now, testing their historical “support” or “resistance” levels while reasons that may shift their direction or break trend lines are awaited.

So, life remains simple in the financial markets even though anomalies are at unprecedented levels. One of the funniest aspects of the situation is that Germany is earning money on borrowing thanks to negative interest rates.

“The 2020 stock rally from lows is now bigger than 1929, 1938, 1974; high prices clashing with positioning (are) verging on greedy bullish,” Reuters on December 20 quoted Bank of America (BofA) analysts as writing in a note pointedly titled “Frankenbull”.

We will see how effective the fiscal support will be in delaying what could be the ultimate collapse, toppling 1929 from its throne.

Amid all the potential carnage and short-term gaming, Turkey’s problems typically go over the head of those pushing hot money flows. Be careful not to get married to Turkish assets while chasing one-night stands.

The new finance minister is another Erdogan man, as is the new central bank governor.

Five-year credit default swaps (CDS) are a popular instrument with which to trade Turkey risk without being subject to capital control shocks or short sale bans/fines.

January generally sees Turkey attract hot money inflows in the global new year rally but the music may turn in February if that is coupled with a step back in monetary tightening.

Given that Erdogan’s current coalition with the market is supposed to help him enjoy a smooth path through the possible global market shake-up in February, onlookers will watch for how long he can bear to keep his policy rate high.

Higher interest rates are friendly to the market but they are a bind for the consumer.

Ordinary Turks right now have no democratic way they can obtain a change in economic policy favourable to them, but Erdogan will keep one eye on his public support—what polls are available indicate his support is below the 30%-level—as he conspires to avoid permanent damage to his standing.

Erdogan is losing support among his base and his practical alliance with the US Democrats may not be enough for him to survive as a puppet dictator.

 Lira: Bets open on timing of next crash

When will the lira crash again?

a-) February

b-) May

c-) August

d-) November

e-) 2022 

Earthquake, drought or black swan?

Scientists are sounding the alarm over how much damage could be inflicted by a big earthquake that strikes Istanbul, a city of 15mn full of unregulated construction and old building stock.

Turkey is also facing severe drought. In western and central parts of Turkey, rainfall decreased nearly 50% y/y in November.

As for outliers, black swans, what might we be discussing in hindsight?