JTW Op-Ed, Öznur Keleş
Turkey’s economy has undergone a major transformation in the last three decades. In accordance with the decision on 24 January 1980, the introverted import substitution model in the economy was abandoned and the export-oriented liberalization policies were implemented. Liberalizing the capital movements after the amendments made in 1980 has led the private sector to borrow from abroad and foreigners to make use of their savings in Turkey.
In addition to several advantages, external financial liberalization has led to the accumulation of new risks in Turkey’s economy, especially because of a lack of control. Increased internal and external debts were some of the main problems caused by unchecked liberalization policies. The debt issue was at the center of the discussions about the last decade when the Turkish economy underwent a major transformation.
External debt from 2002 to present
Fiscal and financial reforms implemented after the 2001 crisis, tightening control mechanisms, and institutional arrangements have consolidated Turkey’s financial structure compared to the 1990s, which had an impact on the external debt dynamics. Thus, an opposite situation for the structure of external debt stock has occurred by comparison with the pre-2000 era. While there was a significant reduction in public debt, the share of the private sector in total external debt has increased significantly. Besides global liquidity in the period from 2000 to 2008, the improvements in Turkey’s economy have made it easier for the private sector to get a loan with low interest.
The following table shows the changes in Turkey’s external debt ratios in the years between 2002 and 2014. As mentioned before, the share of the private sector in external debt has significantly increased since 2002. While its share in total external debt amounted to $43 billion with 33 percent in 2002, its debt reached $275 billion with 69 percent in 2014. Accordingly, in 2014, $275 billion of the $397 billion total external debt belonged to the private sector. On the other side, although the public debt increased from $65 billion to $119 billion, the share of total external debt belonging to the public sector declined from 50 percent to 30 percent between 2002 and 2014. That is, while the external debt of the private sector increased by about 5 times between 2002 and 2014, the public sector’s external debt increased by 2 times. Using this information, it is possible to determine that the implemented policies on public finance are working well.
Both production and external debt increased
As seen in the table, both the GDP and the external debt of Turkey have increased since 2002. During this period, the GDP increased from $233 billion to $800 billion in 2014. However, the external debt tripled during this period.
One of the data to be analyzed in assessing external debt in an economy is the ratio of total external debt stock to GDP. This ratio, which gives information regarding the macro credibility of an economy and also has some thresholds adopted by the World Bank and IMF, is used as a measure of risk and debt analysis. While countries that have a ratio between 30 and 50 percent are assumed as medium-indebted countries, a ratio of 50 percent or higher suggests that the country is heavily indebted. Turkey’s total external debt to GDP ratio has declined since 2002. It was 56 percent in 2002, while it was calculated as 50 percent in 2014, which means that Turkey was categorized as a heavily-indebted country in 2002 and was on the border between heavily indebted and medium indebted in 2014. For the private sector, this ratio generally increased from 19 percent to 34 percent. On the public sector side, it has declined from 28 percent to 15 percent during this period. Thus, this data supports the argument for the public sector.
The other important ratio for external debt assessment is the ratio of total external debt to exports, which shows the repayment capacity of a country. According to the World Bank, countries that have a ratio between 265-275 percent are categorized as medium-indebted. Countries that exceed 275 percent, a critical threshold, are categorized as heavily-indebted. Accordingly, Turkey was in the heavily-indebted category in both 2002 and 2003, but this ratio has declined with time.
Lastly, the ratio of short-term external debt to the Central Bank reserves is important because it indicates the capacity of available reserves to pay the short-term external debt. That is, a smaller percentage is better. However, as shown in the table, this ratio both for total short-term debt and private-sector debt has increased. In other words, the capacity of available Central Bank reserves to pay the short-term debt decreased from 2002 to 2014.
Despite positive developments in the public sector, the private sector’s external debt has still increased. However, the 2008 global economic crisis has showed that private-sector debt could turn into public-sector debt in times of crisis. In other words, the state might be forced into paying a portion of the private sector’s debts if the private sector is not able to pay.
Recent developments in global economy also confirm this potential issue. After the explanation of the U.S. Federal Reserve System in regards to bond tapering, Morgan Stanley, the American investment bank, launched the “fragile five” in September 2013, which includes Brazil, India, Indonesia, South Africa and Turkey. Morgan Stanley declared that these are the countries that are judged to be at-risk because of high current account deficits. Also, increased external debt, inflation rate, budget deficit and growth rate are among the factors taken into consideration in forming this group. As seen in the table, Turkey is one of the most fragile economies among them.
FED’s bond tapering last year led to fluctuations in the exchange rate among the ‘fragile five’ and their currencies depreciated against the dollar. According to Bloomberg, Morgan Stanley economists say India and Indonesia have enacted enough economic reforms to have passed “the point of inflexion away from their old models of growth.” Thus, the ‘fragile five’ has been reduced to three, but Turkey is still among this group.
The dollar was worth 2.65 Turkish lira in March. Increasing exchange rates mean that the value of the debt of the private sector in dollars from abroad increases. That is, the continuation of fluctuations in exchange rates may deteriorate the debt dynamics of Turkey. Therefore, Turkey should stabilization policies which sustain economic growth and external financing flows.