Fragilities are increasing in Turkey's economy

While political and geostrategic risks increase, the deterioration in the economic data also increases the fragility of the Turkish economy each day. The effects on the market of developments that took place last week in our region have been lower than expected. After just a few days of deterioration, markets returned to positive trends.

The main reason for that were the comments from the U.S. Federal Reserve that normalization in the economy, including interest rate increases, would take time. In sum, excess liquidity and the expectation that money will continue to flow into developing countries prevented the endorsement of negative news.

Turkey seems to be in a slightly more negative outlook due to its economic picture and geostrategic position. Still, it appears that the optimism in the global markets is also valid for Turkey.

In addition to negative foreign developments last week, the economic data made public clearly showed that risks have risen.

Faik Öztrak, the deputy head of the Republican Peoples’ Party (CHP) responsible for economic issues, assessed these risks in his latest report. The report underlined that problems had started to become clearer in the data for Turkey's short-term external debt, the shortcomings in the real sector, and the international investment situation, which together consist of the fragile fault lines in the economy vis-a-vis external shocks.

Turkey’s short term external debt, which went down to $4.6 billion in the first three months of the year, has started to enter an upward trend since April. By May, the amount of external debt due in one year went up to a record of $130.6 billion.

Recalling that the exchange reserve of the Central Bank, including gold, is at $130.8 billion, the report underlined that the reserves would not be enough to cover the short-term foreign debt. The ratio of reserves to short term external debt was 189 percent before the global crisis, according to the report. “In this framework, the level the reserve has reached in proportion to the short term external debt is insufficient and worrying,” said the report.

The report recalled that Turkey had a serious foreign exchange deficit to finance. “In particular, a sudden change in the risk appetite of global capital could further deepen the problem in the financing of the foreign exchange deficit. In such an instance, the lack of cautionary assets in the safe of the Central Bank to cover both the short term foreign debt and the foreign exchange deficit could become an important risk for Turkey,” it stated.

There have been serious increases in the foreign exchange positions of the real sector companies, and the deficit in the sector reached $169.7 billion by the end of April. This means that “each one kuruş increase in the dollar currency rate reflects as a foreign exchange currency loss of 1.7 billion Turkish Liras in the balance sheet of the real sector companies,” according to the CHP report.

It is only natural for the CHP to make politically-motivated assessments. But from whichever angle you look at it, it is very clear that the risks are growing.