Turkey. Country of action. The Turkey watcher knows they can hardly take their eye of the place for a split second. And in 2022, such sentiments might apply more than ever. Mired in unprecedented Turkish lira volatility, the nation has entered another phase of escalation in its ongoing collapse in all fields.

It’s well known by now that chaos has beset Turkey’s economy, but how many outside of the country can properly see the chaos that has crept into almost any sphere you can name, from foreign policy to the health system, education system, food security and so on, and on.

The prevailing consensus right now suggests that Turkey is embroiled in a financial and economic crisis, just as it was in August 2018. But this publication is sticking to its contention that the beginnings of the country’s full-blown collapse on all fronts—part of which can be accurately described as a financial and economic depression—can actually be found in the aftermath of the failed coup attempt in July 2016. There has been a nonstop worsening of Turkey’s plight ever since those fraught days when President Recep Tayyip Erdogan declared that he had survived an armed conspiracy to topple him and, emboldened, set about becoming all-powerful.

The last time Turkey saw the type of food and basic goods shortages that are in evidence today was at the end of the 1970s. It was a time when many people died in clashes between the right and left. The PKK, a Kurdish terrorist organisation, arose on that fertile ground. The chaos paved the way for the 1980 military coup.

Turkey rarely enjoys a “bloodless” year, but 2022 has to be marked out as a candidate that will claim an unmistakably tragic page in history when it comes to violence.

The only hope for the country is that the Erdogan administration will chance its arm in a snap poll. Ever since the regime lost the Istanbul mayoral election, plus a rerun, in 2019, we have, rather than posing the question of whether Erdogan will lose the next parliamentary and presidential elections, pondered  whether any election will be held.

The election does not need to be “fair”. Erdogan will lose any election.

In this most positive case, Turkish assets, led by the lira, would see a sharp rally. It would begin as soon as the market became convinced that Erdogan would have to hand over the reins of power. Turkey would then fall into another “hot money trap”, as all “semi-colonies” do. An actual recovery, which could be described as at least returning to the 2015 settings, would require, at a minimum, five years of uninterrupted healing, with the programme to cover each and every corner of life.

It should be noted that, in the post-Erdogan period, any government, democratic or undemocratic, would have to politically and economically surrender to an International Monetary Fund (IMF) programme. And past experience with IMF programmes shows that political ructions would be in store.

Turkey still has access to borrowing on the global markets—though each instance of borrowing at the required high costs brings the country closer to the ultimate end, namely the IMF programme.

A new version of the ruling Justice and Development Party (AKP), working with the IMF, is the likeliest potential major political change you might see on the road ahead.

In the most rosy scenario, the opposition would benefit from the turbulence caused by the IMF’s impositions. There would be a shake-up period and a powerful government, which could apply the IMF programme, would take over at the wheel.

The IMF, of course, is far from a font of all wisdom. Among the demands the Fund made with its last stand-by programme for Turkey, signed in 2001, was a limiting of sugar beet production. Starch-based sugar consumption subsequently boomed. Currently, there are more than 10mn diabetic patients in the country.

Istanbul Mayor Ekrem Imamoglu could be a good candidate for implementing an IMF programme. He is flexible and populist. Deva Party chair Ali Babacan, a former Erdogan ally who was among those who implemented the 2001 programme, anticipates a place at the top table for himself.

The scenario could in a certain sense be seen as identical to what was seen in 2002. Back then, the serving Istanbul mayor Erdogan, was under pressure from the laicist military “tutelage” regime. In the present-day situation, he would be replaced by Istanbul mayor Imamoglu, who is under pressure from Erdogan’s Islamofascist regime. “Moderate Islam” would be replaced by “moderate secularism”.

If Turkey cannot manage to somehow smoothly get rid of the Erdogan reign, nothing would be a surprise amid the turmoil engulfing the country. Erdogan could at any time engage in wars, fuel violence at home, create more economic dilemmas, announce he is moving against another attempt at a “coup”, or conspire in and engender many other things that we can scarcely imagine at the moment.

The law says that elections for the presidency and legislature must take place by June 2023. But since the local election showdown in 2019, the question of snap polls being on the cards has repeatedly arisen. The country has in fact been in an elections “mood” since 2014.

The two-year-long pandemic and the uncontrolled economic collapse that Turkey experienced in 2021 meant Erdogan and his officials never had a window for calling early elections that would get the job of securing another term in office done. As things stand, the regime may feel the pressure in 2022 if it does not adopt the nuclear option of attempting to delay the elections beyond the official deadline. A war is one legal path to securing a postponement.

Snap election

So many varying snap election predictions have been made that a thick fog has descended over the probabilities. Some expect a poll in the spring. Others say June. Still others say autumn. Few believe the country won’t see a contest until June 2023, as scheduled.

Erdogan of late has several times reiterated that the election will be held according to the schedule; thus he has strengthened expectations of a snap poll. Voicing the opposite of what you actually intend is among the main principles for spreading propaganda (for instance, Erdogan and Washington are always very publicly at odds).

In our Outlook 2021 Turkey report, we noted: “Erdogan enters 2021 with his support among voters at below 30%.”

What can reliably be said by now? Only that Erdogan’s support has not fallen below 20%. There is some so-called intensive analysis doing the rounds based on a few opinion polls. However, punditry is not at all challenging when you neglect to take into account the weaknesses of the survey methodologies. It is not our job to lecture people on such methodologies but the fact that generally the media punditry is almost entirely misleading should not be forgotten.

Again, refer back to Outlook 2021 Turkey: “The trick [is] to look for real developments amid all the noise generated in and by the media.”

Erdogan’s health

Erdogan is so frail and sick that there is a question mark over whether he will be able to carry on in office, say some observers. The speculation intensifies the discussion of how the Erdogan regime will end. The supreme leader’s physical and mental performances certainly seem volatile. Lately, he has been reading from a teleprompter. Recent months have also been marked by periods of a few days during which he was “lost from view”. And he has had physical difficulties in front of the cameras.

Turkey is said to remain a one-man show, but there has been an unmistakable deterioration in Erdogan’s countenance and demeanour in recent months and it begs some questions:

·       Who is instrumental in governing Turkey at the moment?

·       Who is using the dictatorial powers Erdogan has amassed?

·       Who is writing what Erdogan is reading on the prompters?

·       How long can Erdogan continue?

 

Poverty turns to hunger

This excerpt from Outlook 2021 Turkey still applies as we “go to press” with Outlook 2022, but for “poverty” please now read “hunger: “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 among] young people in Turkey are abysmal.”

The hunger factor has also helped to awaken Turks high up in the establishment to the dawning reality that by any analysis Erdogan’s time should be up. The number of those who can benefit from the Erdogan regime is in steady decline.

Queues in front of the municipalities’ discount bread kiosks are the new norm. It is thought there are around 30mn people in Turkey (population 84mn, not including millions of refugees) who are going hungry.

Foreign policy

Our Outlook 2021 Turkey report read: “As things stand, it seems more likely that [the Biden] administration will aim to make use of Erdogan… If Erdogan can find a role for himself in the Democrats’ new game plan, he can survive throughout 2021 despite all of his weaknesses.”

Erdogan has managed to dig his claws into a “transactional” partnership with Joe Biden. In partnership with Qatar, he took over the Kabul Airport mission in Afghanistan. The question is how he can fulfil such a mission in such a hellish situation.

Turkey could be drawn into a conflict scenario at the airport at any moment as its personnel (only civilians) are open targets. It is said that Turkish military units are on standby in Pakistan to come to the rescue in the case of an emergency.

Despite its distaste, the Biden administration has somewhat backed the Erdogan regime up to now, but Erdogan has been disappointed by the lack of photoshoots with Donald Trump’s successor. Such are Erdogan’s growing difficulties, though, that Joe Biden’s tentative support and bog standard photoshoots may not be enough.

One positive development in 2021 was that we stopped hearing“the perennial story suggesting that Erdogan will be smashed between Washington and Moscow” and wrongheaded analysis on whether“Turkey is becoming a proxy of Russia/China”.

However, the traditional “something must be done” stories on Erdogan’s abuse of basic human rights in Turkey won’t go away. As long as enough Western politicians keep mouthing “something must be done”, but stop short of actually doing anything meaningful, the realities of relations between the West and Turkey need not be uprooted.

Those who take the EU seriously in this sphere are incurable. Leave them to themselves.

 

Halkbank case

More from Outlook 2021 Turkey: “The sanctions noise and the Halkbank court case… will continue to hang over Erdogan’s head...”

The next hearing in the Halkbank case, which could mean the airing of some uncomfortable evidence for Erdogan, is not yet set. On October 22, the 2nd US Circuit Court of Appeals rejected the state lender’s bid to dismiss an indictment accusing the bank of assisting Iran in the evasion of American sanctions. Halkbank appealed the ruling. On December 17, the court rejected this appeal too.

The Erdogan regime takes any chance it can to slow the process of bringing Halkbank to trial while the US uses the case as a Sword of Damocles.

The US is also chasing ‘SBK’, a Turkish “businessman” currently under arrest in Austria. The case could mean more leverage held by the Biden administration over Ankara.

No harvest of military “attractions”

The past year presented few opportunities for Erdogan to create some expeditionary military “attractions” that firm up his base support. Not that he won’t chase up any chances he gets in the coming year.

Even the PKK, a Kurdish separatist terrorist organisation that over the years has been a handy target for the Erdogan regime whenever it has needed some bloody action, is nowadays not producing much for the gun sights.

The jihadist groups backed by Erdogan remain a ticking bomb. Recently, one jihadist cut the head off a student in Antalya. Another targeted three Syrian workers while they are sleeping in Izmir, leaving them with burns. On December 28, somebody attacked a pro-Kurdish HDP office in Istanbul.

With the military “attractions” route somewhat exhausted, officials are focusing on geeing up Turks with natural gas and gold “discoveries”, which in reality don’t exist, at least not to anywhere near the extent claimed. Stagnation is in the air. Erdogan’s people even seem to have little energy for pushing their master’s infamous “Canal Istanbul” project, a wild mega infrastructure scheme that would cut a swathe through Turkey’s largest city, causing tremendous environmental damage while offering few commercial gains.

However, despite all its weaknesses, the regime is still able to herd enough of the global media to keep the “warts and all” story of the disastrous Erdogan administration from view.

Virus

Outlook 2021 Turkey: “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…”

In pandemic news, since November, the highly infectious Omicron coronavirus variant (one whiff of breath is all it takes to get infected, doctors say) has been taking over from the Delta variant. As 2021 came to a close, there was even talk of another variant, Delmicron, namely a combination of Delta and Omicron. Europe was partly locked down.

Under normal conditions, the winter of 2021-2022 should be the last winter of the pandemic. There are hopes that Omicron will take us from pandemic to endemic, with low Omicron severe illness and death rates and the variant coming to be regarded as nothing more than a “common cold”. However, don’t bet the farm on it. Take into account that by the end of 2022, we could be watching the development of yet another deadly variant.
 

Global outlook

Our Outlook 2021 Turkey report read: “So, perhaps, we should not easily buy the recovery in the ‘real economy’ story for 2021…

“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, 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…

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

The Fed’s balance sheet is still breaking records. On December 15, the Fed said that it would cut its monthly net money printing volume by $30bn to $60bn in January from $90bn in December. It plans to employ identical cuts in February and March.

The Fed’s net money printing is thus to reach zero in April. The previous schedule, released in November, suggested zero in July rather than April.

The Fed governors, moreover, currently expect the delivery of three rate hikes in 2022. They would bring the policy rate up to 0.75-1.00% from the current 0.00-0.25%.

Note that around $1.7 trillion has already been printed. It presently resides on the Fed’s balance sheet under the Treasury General Account (TGA) and the Reverse Repo (RRP) account. When the Fed zeroes its net money printing volume, this money will continue flowing into the system.

On January 29, the Fed will release the results of its next meeting.

The USD index (DXY) is still hovering in the 96s. The new year rally normally lasts till February.

Amid the growing Fed “tapering” talk, Congress continues to chew over the Biden administration’s expenditure packages. Various packages worth trillions and trillions of dollars are discussed. It is hard to follow up on all of them. Discussions over the tax hike plans continue.

The aim is to pump money via fiscal policy instead of monetary policy. However, there is growing and visible inflation by now; it was previously ‘stored’ in the form of asset price bubbles during the longer-than-a-decade money printing super-boom.

Via fiscal or monetary policy, the money printing must proceed; no-one will contemplate stopping it until inflation gets totally out of control.

GDP

WARNING: If you use macroeconomic statistics in real life, avoid planning or pricing based on Turkish Statistical Institute (TUIK) data.

Macro data is like religion. The less you know, the more you believe. Despite all weaknesses, when identical data methodology is incorruptly applied across each term, an opinion can be formed as to direction. In Turkey, there is no such application.

Outlook 2021 Turkey: “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…”

The feeling of the Inception movie (“It’s only when we wake up that we realise that our dream was actually strange”) is not unfamiliar to observers of Turkey, which never solves its problems and steadily becomes more and more gangrenous.

Deliberately or not, all inferences based on Turkey’s official data can only be manipulative. It is not even funny to hear “Erdogan chooses growth.” There is no growth in Turkey.

Outlook 2021 Turkey: “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.”

The overall collapse was avoided “by the inside of the goal post” with the welcoming of around 25mn foreign tourists. The cost was thousands of people dying of COVID-19.

On December 8, Moody’s Investors Service hiked its 2021 GDP growth forecast for Turkey to 11%.

This does not, however, mean that the public “bidding” on the outcome has ended. Far from it. It will come on stronger and stronger in the run-up to the GDP announcement date in March.

Erdogan likes to roll out the biggest GDP growth figure possible, so here at bne IntelliNews we are always one step ahead of everyone. As early as November 18, we hiked our expectation to 15%. We moved into the double digits three months previously in August.

Inflation

That Inception movie feeling referred to is also present when it comes to Turkey’s policy rates, lira and inflation.

Outlook Turkey 2021: “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.’

Also from Outlook Turkey 2021: “It is not anticipated that the ongoing monetary tightening process—backed by a further 200bp hike 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.”

It was in March 2021 that Erdogan fired his “orthodox” central bank governor.

More from the 2021 report: “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.”

On January 3, official inflation for December (end-2021) will be released. The market assesses that the figure must be something around 30%. [Editor's note: it was announced as 36%]

The Inflation Research Group (ENAG), an independent body led by Istanbul academics, gave a figure of 49.87% for November inflation. Its inflation for end-2021 may come in in the 60%s. [Editor's note: it was calculated as 83%]

If the speculation suggesting Erdogan wants a monthly mortgage rate of 1% proves correct, a 12% policy rate (banks’ funding cost) would be below the annual compound rate of around 13% that the 1% monthly mortgage rate implies.

Some speculation suggests that Erdogan wants a single-digit policy rate.

On January 20, the first rate-setting meeting in 2022 will be held. Giving its last rates decision on December 18, the central bank implied that it is planning to keep the benchmark on hold in Q1.

Latest lira “blockbuster”

The Erdogan regime always makes interesting choices. Since December 20, it has again been burning wildly through the reserves.

Erdogan’s son-in-law Berat Albayrak is the patent-holder of the idea of “pressing on the USD/TRY rate and pushing FX-holders to panic sale”.

When Albayrak became finance minister on July 10, 2018, the USD/TRY rate stood at 4.71. Its latest all-time record low was registered on December 20, 2021 at 18.37.

On the evening of December 20, the Erdogan regime staged a new lira “blockbuster movie”. Following a “cabinet” meeting (the supposed “cabinet” is not actually a cabinet), Erdogan announced a new instrument that guarantees lira deposits against currency depreciation. We are not going to dig into the details of this instrument here as it is simply a “troll” and does not make much sense.

Simultaneously, some invisible hands brought pressure to bear on the USD/TRY rate. The pair closed the day at 13.51 and saw as high as 10.16 on December 23. By the end of December 31, the rate was around 13.25.

After the announcement of the instrument, a media campaign was launched to portray Erdogan as slaying the USD and citizens as rushing to sell their dollars.

Pro-Erdogan media that buy into the idea of Erdogan waging a “war for economic independence” with a new unconventional economic strategy represent the FX-guaranteed lira instrument as the “rabbit pulled from the hat”.

Where the purported economic brains of the Erdogan regime are concerned (with the boss to the fore), it is a waste of time to mention the destructive side effects of the huge currency volatility that has been unleashed.

At the end of the day, the currency tension continues. New records of depreciation will arrive until Erdogan changes his mind on cutting interest rates in a high-inflation environment. The U-turn will cost the heads of the latest central bank chief and finance minister.

Since the new rate-cutting cycle was launched on September 23, bringing 500 bp of easing to date, the reserves and available firepower for defending the lira have returned to the spotlight. But everyone is so bored of this repeating story. Those who do not have to engage in lira business simply ignore Turkey, its currency and bonds.

The amount of usable reserves that the central bank has access to is unknown. The national lender’s net FX position, when swaps are excluded, fell by about $20bn in December and broke records by approaching minus $70bn. The gross reserves fell to $115bn from above $128bn. However, this sum includes around $15bn in Qatari riyal, $5bn in Chinese yuan and $8bn in SDRs from the IMF. $2bn in Korean won has not arrived yet.

‘Goldollarisation’ to continue apace

The share of FX-linked deposits in total deposits placed with Turkish banks has leapt to record highs.

The previous record levels of such deposits were registered as far back as 2001, the year that brought the greatest economic crisis experienced by Turkey in recent history.

Indicators on the current economic turmoil are exceeding the historic financial tumult suffered in 2001. They are now comparable with what was seen at the end of the 1970s, when a-several-years-long great depression in Turkey ended with the military coup in 1980 that led to a junta ruling for three years.

NPLs

Outlook Turkey 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.”

Shame on us, we had underestimated the range of the Erdogan regime’s hand when it comes to releasing dodgy data. Problem loans still hover around 15%.

Outlook Turkey 2021 continued: “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 [now always] in the midst of a growing… 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.”

One correction: as things stand, the public banks are not even able to release some baseless figures on growing profitability.

Outlook Turkey 2021 added: “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.”

Cough it up

Banks only bankrupt when governments want them to bankrupt. Erdogan and his officials are not seeking bank bankruptcies, but some cash injections are required. The regime achieves this by exchanging some government papers among the Treasury, the wealth fund (TVF/TWF) and public banks. The owners of private banks have to cough up.

Public finances: A black hole

Outlook Turkey 2021: “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.”

It is amusing and awful at the same time to recall that there was a “reform” story circulating on the markets at the end of 2020, while this publication was desperately repeating: “Erdogan need do no more to prove that he is a destructive, not a constructive, force.”

Current account surplus?

If you buy the official data, the surplus is there. The problem is that the regime believes in its own fake data and then wonders how its currency is wildly depreciating while the economy is producing such a surplus.

Let’s repeat: “Turkey’s export performance depends on demand conditions in the EU, not on the value of Turkish lira.”

The story across 2021 suggested that Turkey’s exports were breaking records. That was correct in USD-terms, with imports also breaking records. It is called inflation.

Financial flows stopped; as a result, they are stable. There is not much hot money left. The game is played out only among locals.

 

External debt

Let’s just insert the classic boilerplate sentence with a year-change: “External financing needs for 202[2] remain high … it can be assumed that external debts will be rolled over in 202[2] as well.”

Next stop is the spring season for Turkish banks’ syndicated loan renewals. Creditors will seek higher rates, but their problem is how to avoid a huge Turkey default.

Eurobonds

Let’s boilerplate again: “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.”

Turkey eurobond auctions have not taken place since September. There are some small-cap candidates seeking chances, including Turk Eximbank, Sekerbank (SKBNK), Albaraka Turk (ALBRK), Guris Holding, Calik Holding, Istanbul Municipality, Aktif Yatirim Bankasi and Nurol Holding.

 

Credit ratings

Fitch Ratings rates Turkey at BB-/Negative, three notches below investment grade. Moody’s rates Turkey at B2/Negative, five notches below investment grade, while Standard & Poor’s has Turkey at B+/Negative, four notches below investment grade.

Downgrades are on the way.

 

M&As

Outlook Turkey 2021: “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.”

The process did indeed begin in 2021. Foreign companies’ interest in Turkish manufacturers remains on the rise. The main theme in the recent M&As seen in Turkey centres on foreign buyers taking over the debt of indebted manufacturing companies.

 

Markets

Let’s just drop in the boilerplate line here: “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.”

 

Borsa Istanbul

For investors who are not short-term professional 'hit-and-run' types, there is little attraction in attempting steady investment on the Borsa Istanbul.

 

Drought

Outlook Turkey 2021: “Turkey is also facing severe drought. In western and central parts of Turkey, rainfall decreased nearly 50% y/y in November.”

The number of sinkholes in the Konya Plain during 2021 increased from 600 to 2,000.

 

Never forget

“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.”

 

Black swan?

What black swan? In 2022, nothing will be a surprise in Turkey.