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Chopping the Invisible Hand that feeds you

26 March 2019

One of the monumental legacies of the 15-year old AKP administration could be establishing a truly rules-based free market economy in Turkey, and making the country an integral part of the “single global market”.  In some sense, the liberalization  of the economy initiated by deceased president Ozal, and reinforced by the Kemal Dervis inspired reforms post-2001 crisis were completed by AKP, around circa 2012.

At the  eve of 31 March municipal elections, which Erdogan and his nationalist ally Mr. Bahceli (MHP) turned into a struggle for the survival of the unitary state, this legacy is in jeopardy.  In an effort to win the elections, led by economy czar Albayrak, AKP launched a Blitzkrieg on the free market economy, sending several critical industries and institutions into a coma.  Much will depend on the results of the elections in Turkey.  Erdogan and Bahceli’s political survival is the lesser concern.  The big question is whether the  Invisible Hand  can be resuscitated.


The rot set in after Gezi protests

Turkey’s institutional decline commenced after Gezi protests, when Erdogan lost faith in the 50% or more of the nation, who would never vote him.  The state was subverted to keep the pro-Erdogan %50 happy, well-fed and captive voters.  The decline accelerated in two stages. First the 2013 clash between AKP and its erstwhile ally the Gulenists hammered judiciary and free press.  Secondly, the crack down on liberties and blatant disregard of rule of law after the 2016 coup undermined many of the pillars which support and sustain the free market economy.


Elections deal a near-lethal blow of free market

The final campaign began in January, when Erdogan realized that he can’t possibly win March local elections, with an economy mired in a deep recession, and inflation hovering around 20% per annum.  Neither could he use the three traditional means of pork-barreling which aided him in winning past contests.  Monetary policy had to be kept tight, lest the Lira experienced another melt-down.  Room for fiscal stimulus, though it was used, was very narrow,  because domestic borrowing led to immediate crowding out, complicating the debt problem of the private sector. Demonizing “foreign nations” wasn’t wise with   EU (the Nazi affair) and USA (Father Brunson) having demonstrated recently how damaging the backlash could be to the economy.


Thus, Erdogan allowed Albayrak to devise an ingenious plan to dole out the pork    to the voters, while flying under the radar of international creditors and investors and remaining friendly with the west.


Brutal price suppression

First, a harsh campaign of intimidation was launched on the industry and trade to halt price increases, enforced by Trade Minister Mrs. Ruhsar Pekcan, who sent her inspectors to any shop, where there was a complaint about “price gauging”.  Lately, one of the few   institutions in Turkey untainted by political cronyism, the Anti-Trust board was drafted into this campaign, which is busily investigating retail chains and poor wholesale fruit and vegetable merchants on suspicion of price fixing!


Even when these efforts failed to suppress food inflation still raging at 26%, Erdogan launched municipality food banks, which sold key staples at a loss,  killing the profits of small food retailers and feeding back through the supply chain,  discouraging farmers from planting sufficient vegetables, potatoes and legumes.


The bankruptcy protection craze

The side-effect of the brutal “anti-inflation”   campaign was a sharp drop in corporate sales, as a result of which thousands filed Chapter 11 bankruptcy protection.  Many companies not wishing to pay off debt joined the queue, benefiting from Turkey’s lax  creditor protection laws.


Chapter 11 became a craze among corporates and a matter of national fascination.  The flack was so bad, Albayrak invented a new scheme.  Turkey’s banking regulator BRSA was instructed to put pressure on banks to lower loan and  deposit rates, while AKP organizations across the nation actively “intermediated” loan restructuring deals between distressed firms and hapless banks.  In return for “extend and pretend”, banks were granted regulatory forbearance.

According to Albayrak state banks handed out TL45 bn of new loans to small and medium size enterprises, while private banks were forced to renew maturing loans at wafer thin interest margins.    It is anybody’ guess to whom the loans went and whether credit risk was measured adequately.


Now, state banks and Central Bank

The final ploy was to use state banks to sell foreign exchange abroad to keep TL stable, funded by SWAP agreements with Central Bank.  When the con game collapsed on Friday, with CBRT reporting net F/X reserve losses of more than $5 bn, TL crashed again.


Today, opposition websites and traders on twitter write that state banks are intervening in the currency market again, while the life-blood of liquidity for Turkish banks, the London swap market crashed, with dollar/TL swap rates rising to 230%!


Ironic, that none of these market-distorting measures seemed to help in the polls.  There are exceptions, but a majority of them conclude that AKP-MHP is set to lose Ankara,  Izmir,  Adana, Antalya, and perhaps Mersin, while the much demonized pro-Kurdish Rights HDP is set to recapture all of its bastions in Eastern and Southeastern provinces.


What will happen after the elections?


If contrary to poll findings, Erdogan and Bahceli keep large cities and the combined share of their vote remains at or above 50%, there is strong chance that the final assault on the free market economy will be stopped and an IMF-light stability and reform program initiated under the leadership of Albayrak.  But, if AKP-MHP lose, it is more likely that Erdogan will panic, sacrificing the free market to voter satisfaction and in the process chopping off the Invisible Hand.


At the end it is true. This race is about survival.   The survival of the free market economy!


Atilla Yesilada


To find out more about the author, visit GlobalSource Partners website



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