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14 years lost. This is how pretending to be a superpower ends

14 Aug 2018 11:39|Marcin Lipka

"The Turkish authorities have tried to convince the public that they can quickly build a strong and independent country which will become the power on the international stage. Unfortunately, they have forgotten that the credibility of the economy is not based on decrees and infrastructure projects. Now, a huge cost of a wrong policy will be borne by the citizens through a drastic fall in their real salaries," writes Marcin Lipka, Conotoxia senior analyst.

On the basis of these two indicators, it was completely wrong to conclude that the Turkish economy was an oasis of rapid development and low indebtedness. In fact, the expansionary fiscal policy has been hidden in, among others, corporate loan guarantees and the large external debt of the private sector.

Insane projects

A few years ago, infrastructure investment plans reached even 700 billion dollars (almost 100% of GDP) until 2023 (this is no coincidence - in 5 years it will be the 100th anniversary of the Turkish republic proclamation). Now they are estimated at about 200 billion dollars. The authorities are constantly boasting about new tunnels, roads, bridges and airports.

The giant airport in Istanbul is to be open later this year. It is expected to handle around 100 million passengers per year and ultimately increase its capacity to 200 million passengers. It will be the largest airport in the world and, according to the Financial Times, it is expected to cost 35 billion USD.

There are also plans to build a canal parallel to the Bosporus, the cost of which is likely to exceed 10 billion USD by 2023. No less insane are road construction projects. Two years ago, the Turkish General Directorate for Motorways presented its investment plans until 2023, during its presentation "Benchmarking Transport Infrastructure Construction Costs" in Geneva.

In 2016, more than 300 km of tunnels were built (more than during the last 13 years, which can also be described as the investment boom). This year, 631 km of motorways were also built, and by 2023 a total of about 2,500 km of new motorways are to be completed, and their network is to be doubled. Larger infrastructure projects, even by President Erdogan himself, were called 'insane', although in a good way.

Implicit liabilities

A large part of infrastructure projects in Turkey are implemented through public-private partnerships (PPP). At present, it is about 60 billion dollars, according to the International Monetary Fund (IMF) estimates. Financial information on these projects is incomplete and does not include investments contracted e.g. by treasury companies or local governments.

On the other hand, financing provided by private companies is often covered by state guarantees (e.g. from the Ministry of Treasury). In the event of failure, the debts of these companies can therefore easily be transferred to the state.

External debt

Additional commitments of the Turkish economy are well reflected in the foreign debt, which, according to IMF data, amounts to 53% of GDP, and 90% of it is denominated in foreign currencies. In addition, a significant part of it is a short-term liability (one third has to be repaid within 12 months).

According to the IMF "External Debt Sustainability Analysis", conducted in April and published in the "2018 Article IV Consultation", cyclical report from Turkey, the stability analysis shows that the 30% of the Turkish currency depreciation is causing the external debt to rise above 80% of the GDP. It so happens that at present, this depreciation is even greater than 30%. It means that there is huge pressure to increase the cost of funding for Turkish companies and a significant increase in the risk that some of them will have to be taken over by the state.

A lesson for others

The Turkish example shows how not to manage a country. If internal and external imbalances linked to high current account deficits emerge, the economy will become inefficient at local level and uncompetitive globally.

Turkey, however, pretended not to see this problem, which caused the international dispute to result in a sudden lack of funding for 'insane projects' and to put the country in a state of crisis immediately. However, even if Turkey had no conflict with the US, as it is today, it would have been in a crisis situation anyway, although probably in a milder form and over a longer period of time.

Salaries lower than 14 years ago

The citizens will pay a high price for the superpower decisions in the state economic policy and the lack of willingness on the part of the central bank to fight inflation. Those who go abroad are already seeing this, and in a few months everyone will see it in the form of a dramatic increase in inflation. According to OECD data, the minimum wage in Turkey is currently 2029 liras gross, or 312 dollars (1170 PLN), calculated at the USD/TRY exchange rate at the 6.50 level.

The drop in the lira value brought back the Turks' salaries to below the value of 2004 (a year earlier, the current President, Recep Tayyip Erdogan, was appointed Prime Minister). According to the OECD, the minimum salary was then 433 liras, but the dollar cost 1.34 lias at the end of 2004. This means that the salary expressed in dollars was 323 dollars, which is more than the current salary.

14 Aug 2018 11:39|Marcin Lipka

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