Turkish travel agencies are happy as clams. The lower the Turkish lira sinks, the more tourists flock to the country, taking advantage of Turkey’s economic crisis to have a cheap vacation and buy up goodies on the cheap.
Turkey’s beaches had been largely deserted following Russia’s imposition of sanctions, a state of affairs that only changed in August 2017, when Turkish President Recep Tayyip Erdogan apologized to his Russian counterpart for shooting down a Russian fighter jet in November 2015. Since then the two leaders have become quite close, and Russian tourists have returned, in droves.
With the Turkish lira imploding, local Turks have stocked up on foreign currency and both the locals and tourists began storming the malls, lest the lira suddenly rebound and products become more expensive. It seems the Turkish retailers don’t change prices every time the exchange rate judders, for fear of deterring shoppers: the result is that the price in Turkish lira stands, but it sinks in dollar terms.
The same seems to apply to the real estate market: if property prices are held in Turkish lira terms, then they suddenly become highly attractive in foreign currency terms. Investors from Europe and the Gulf states have been flocking to realtors, grabbing homes and land as long as the crisis rages on.
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Turkish tourism authorities are anticipating a cool 40 million tourists in 2018, bringing in $32 billion or so, about 50% more than last year.
Over at the Turkish finance ministry, they anticipate a tremendous increase in trade with the Arab nations, which they expect to rise to $70 billion this year. In the first half-year of 2018, investments by the UAE in Turkey rose fivefold to over $550 million, almost 10% of total foreign investment in Turkey (the biggest investors are Britain and the Netherlands). Russia and China are also stepping up investment in Turkey, as are Iranian companies.
“The crisis is mainly psychological in nature,” says a member of the Turkish financial committee, in a conversation with Haaretz: Turkey has a strong economy that will continue to grow, he says. What it has to do is calm down fretting investors, which is what it’s doing now.
Could Erdogan change his mind and allow interest rates to rise?
Erdogan is a practical man, the committee member says: he extracted Turkey from crisis in 2000 – inflation had been running as high as 7,000%, jobs were lost by the thousands and the lira was in freefall. All of which puts the current problems into proportion, the committee member says.
Ergodan’s election in 2003 brought political stability, following the lack of leadership which led the banks to collapse and brought about the political sea-change. Turkey today is ruled by a president who has all the power: he guides legislation in parliament, which he controls, and turned the national economy into a family firm with the appointment of his son-in-law Berat Albayrak as minister of the finance and the treasury.
This week the Turkish central bank published new directives regarding bank liquidity, to assuage concerns about a shortage of foreign currency. Turkey and the IMF have been denying reports that the country has asked for a loan. Turkey does not need to borrow, says its treasury staff – it has enough money. Their denial strengthened the lira, but not by much.
The assessment, at least among economists in the leading party, is that a single decision by Erdogan to raise interest rates would restore stability.
Economically, that’s quite the optimistic guess. The Turkish economy needs structural reforms beyond raising interest rates. First the president needs to reach a strategic decision, weighting the desire for growth against restraining inflation, which is presently running at about 15%.From Erdogan’s perspective, the decision is ideological, says an Ankara researcher. He aspires for Turkey to have the 8th biggest economy in the world, compared with its ranking today of 17th. That would mean doubling output, which would require tremendous investment, mainly by foreign investors, he explains. And this is where things come apart.
Unless foreign (and local) investors have faith, there will be no economic growth; and unless interest rates are lifted, they won’t have faith.
It’s a dilemma, but it doesn’t have to be black and white (growth or interest): there can be shades of gray. If he wants to, Erdogan could retreat from his demand for ambitious growth and explain to the public and investors that what he supports now is raising interest, to prepare for the growth spurt that would happen as the economy calms down. Psychology will play a key role, says the analyst – among the people, and on the president’s part, too.
There is another key element, beyond psychology and economics, though: Erdogan’s prestige. He accuses the U.S., Israel and other external elements of trying to diminish Turkey’s status. The American sanctions, including a doubling of tariffs on iron and aluminum goods, didn’t create the crisis, but they do play into Erdogan’s hands. Now he can accuse Trump of trying to wipe out the Turkish economy. Erdogan seems likely to continue to dance on the edge of the sword, as long as the Turkish people confine their angst to storming the banks, not demonstrating.