Long-term treatment is a must
Looking at the fall of the dollar from the TRY 7 ceiling to 6 while entering the Eid holiday, it was as if the problem was solved and we had switched to an atmosphere of post-crisis relief. But on the first day after the holiday, we saw that currencies were again overly volatile and tended to rise.
Despite the measures that tightened TRY liquidity excessively in swap transactions, which are used as an important tool in the foreign exchange market, currencies continued to rise because the main reason for extreme volatility and strong upward tendencies in the currencies was not speculative attacks. The main reason was that the basic fragilities of the economy reached an extreme level while the environment of abundant cash in the world was reversed. When our economy becomes so fragile, the effects of all kinds of external games are many times higher.
There is the current account deficit trouble on one side of the fault line. The current account deficit has doubled in two years. Bad economic policies that have been applied for years, including hormonal growth which went off the rails during the election period, is growing the deficit dangerously.
On the other side of the fault line there is the drying up of external sources. Direct investments, which are most prevalent in external sources, are steadily declining. The annual total direct investment inflow is down to about $10 billion. As of June, total direct investment inflow over 12 months was $10.7 billion. Of this, $4.5 billion was made up of real estate purchases. Economically meaningful production and service investments were only $6.2 billion, most of which was the increase in capital of existing investments or the purchase of existing companies. So the money for fresh investment was very low.
The decline in direct investments is a serious hurdle both for today and for the future. However, the most abundant fuel in today’s fire is the rapid decline in the entry of hot money. As of January, the total hot money inflow in the last 12 months was $28.5 billion. Hot money inflows from stocks and bond purchases and deposits fell by a total of $8.9 billion in June.
A decrease in such a short time indicates that there is a serious exodus from Turkey above and beyond the general trend in the world. The fire has been burning since the beginning of the year; the Pastor Brunson case just fanned its flames.
When you cannot draw direct investments or hot money, when the sources you can attract for one or two items do not even reach $20 billion, and you add to this a current account deficit of $55-60 billion, you also push the inflation rate off the rails.
If you add the extreme foreign exchange debt of the private sector, the external debt burden that has to be turned over in a year, and rising interest rates in the world, fragilities become unmanageable.
The measures taken by the Central Bank and the Banking Regulation and Supervision Agency put a partial brake on currencies but their effects are limited and short-lived as they do not change the fundamental problems. Moreover, these measures create other problems such as excessive interest rates on TRY and a meltdown in reserves. For this reason, their sustainability also raise questions.
What will determine the course of currencies, inflation, and the economy will not be these topical treatments but rather how much and in what way basic economic policies will change and how much confidence they will provide. The extent to which the mistakes of domestic and international politics persist, which have become the main problem of the economy, will continue to be a fundamental factor.