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Turkish Economic Conundrum and Kurdish Emergence

September 15, 2016
Verizano Bridge Sundown

Turkish Economic Conundrum by LushFun

 

Contrary to popular opinion that money wants tranquility and quiet of most emerging

markets Turkey held up the most, especially if one were to take into account currency

fluctuations. This is in light of all the political tumult of the past several years. It has been

one of the relatively stable emerging markets, especially in regard to foreign exchange

fluctuations.

This is likely to begin to end. It has less to do with politics but with the overall

orientation of the economy. Ergo, export oriented economic growth reliant on foreign

participation in various sectors; from tourism, energy, manufacturing, logistics services

and so on. Balance of trade will have a tough hurdle to climb in being able to make up

tourism currency flows and export market losses. Oversaturation of global markets and

increased competition make marginal producers the expendable capacity that gives up

utilization and operating fund flows to other participants. In some ways Turkey is reacting

to these aspects by fostering a more flexible financial system by expanding Islamic banking

and pushing down rate policy. However, there is a big problem on the horizon.

Coming dollar bond maturities in the financial sector that will begin to come more

frequently from the beginning of 2017 will pressure foreign reserves. This will create a drag

on the financial system since many of the banks have borrowed in foreign currency, U.S.

dollars and Euros mostly. It is very likely that the outflows of these funds will have a

multiplier effect on the Turkish economy that will magnify the pressure on the Euro/Lira

and U.S.Dollar/Lira, exchange rates. Posture of Turkish economy currently would have a

tough time adapting to these headwinds. A competitive devaluation in an environment

where utilization of factories and productive assets is levered via an ability to arbitrage

marginal demand in key industries, such as: tourism, construction, logistics, food

production may work over long periods of time. But, during a short to intermediate period

it would impact the ability of raw material imports, marketing, and other facets. The

coming crunch may influence a severe devaluation in Turkey over a two year period, to align

purchasing power carried by its’ potential markets of export, Russia and former Soviet

States, and the Middle East.

 

Math that is fairly straightforward. Total foreign reserves were around 112 billion dollars of

which 19 billion dollars were gold, about 1 billion in SDRs and the rest in other convertible

currencies, mostly dollars and euros. Ergo, 92 billion dollars with a rolling 12-month

rolling deficit of -27 billion dollars. At around 2-3 billion dollars in deficit a month Turkey

will face tough choices in the coming 18-24 months if one considers the contingent

liabilities of its government, corporate sector, and financial firms at around 74 billion

dollars. Something somewhere will have to give to curtail the outflows in light of lower FDI

and balance of trade aspects.

Three internal pressure positions have to be resolved. Lower growth and unemployment in

regard to marginal slack due to trade and tourism disruption. Immigration and

non-integration of culturally different minorities, ergo, Kurdish population and the

millions of Syrians whom are now living in Turkey. Finally Turkey will have to reconcile

capital constraints in the financial sphere either through capital controls or injecting of

capital that has to come from somewhere to offset the maturities of upcoming debt. Note

the last aspect is slowly but actively gaining some traction with attempts to entice FDI into

 

various sectors and a formation of sovereign wealth fund, but thus far it has not brought

the necessary results.

 

All three internal positions come against external political vectors. We can reconcile them

as following. North that includes the Post-Soviet space, South that involves Middle-East

and Africa, and West that include Europe and U.S.. Western vector is coming into increased

scrutiny due to conformity and compliance expectations that are in conflict with Turkish

power verticals being established to posture society for stability during the shifting phases

of re-configuration of politico-economic re-alignments. Abandonment or attempts to

significantly leverage away will put in danger the financial system and disrupt the last

remaining export markets Turkey is now dependent upon, while it mends its other outlets.

Contention for economic and political representation in light of the decline by minority

elements that are the most marginal on the economic curve; Kurds and Arab refugees from

Syria has to be addressed to mollify both the Western vector and situation at large.

Thus, Turkey is relegated to push forward maximalist leverage upon focal points where

minimalistic returns can be garnered. In some sense this is a path of desperation where

each of their external vectors may extract optimal concessions. Each concession will limit

the flexibility of future trade-offs and we can see this in Russian reconciliation position

that will lower the amount of Saudi and other financing that contends with other

geopolitical positions in the region.

 

There is one player that has the maximum amount of leverage that can provide Turkey with

breathing room, via opening of markets or capital participation. China, has the most

leeway to leverage a position in the economic space. Albeit, there would have to be an

integration into a larger scope system to yield out results that would make this

interventions worthwhile. Thus, Russian reconciliation ties into this tandem to create a

land bridge that would make it possible to approach such a proposition. However, the

economics of such a proposition are moot even under the best circumstances.

 

Right now we can see there is a hidden temporal constraint. It is tied both to economic

imperatives and necessity to stabilize the social structure into conformal amplitude that

could allow for development. Turkey still has a few cards it may play. NATO exit or frozen

participation may provide certain concessions but they would not be long term fixes. It may

freeze participation in EU customs agreement which be a fairly destructive undertaking,

closing the last market outlet it has. Such an event is highly unlikely though.

 

Certain hypothetical events do come to mind. If Turkey threatens to leave NATO, where

would it go? It is possible that it would be able to reposition into CSDP(Common Security

and Defence Policy) before exiting NATO, which would ameliorate differences with

European members, such as; Greece and other Balkan states, while simultaneously provide

it with the aegis of remaining part of the West, but on different terms. A bridge to

re-configure the relationship that would perhaps provide funds and gravitas to both EU

and Turkey. Granted the likelihood of this event is negligible it would allow a far more

flexible relationship to both parties in their foreign policy and solve short and intermediate

problems. It would also effectively provide Europe an exit strategy from NATO similar to

the Brexit event, only on a different strategic plane. It may also solve Turkish procurement

and technological problems, especially if one considers they already participate in some

OCCAR(Organisation for Joint Armament Cooperation) programs. An event such as this

would require major concessions from Turkey and Europe but would allow a competing

alliance that is under NATO umbrella but without compliance issues.

If we look at foreign policy Turkey aligned with, we can clearly see a policy where the

foundation backed into dominance to put forward an agenda that others should coalesce

into. This proved to be a failure for various reasons. An integrationist approach to gain

from overarching agreements between states would have yielded more robust results with

fewer strains while removing a winner take all mentality. It is obvious that transitioning to

integrative approaches that are feigned at by the leadership right now are a matter of

survival and once freedom of action returns, defecting to a different strategy may likely

occur. Trust internationally to view Turkey as a consistent actor is fairly low. Dependence in

trade, weaponry, raw materials, technology, capital, and other aspects, puts forward an

increasingly deterministic and opportunistic action map.

 

What does Turkey want from the United States? Even if Gulen was given up it would not

address any of the problems Turkey currently faces, other than provide it with expendable

clout. Access to a swap line from the Federal Reserve similar to what the ECB received

(during 2008 crisis) to bridge maturity gaps and secure a financial transition would be

extremely enticing. However, the likelihood of Turkey providing compliance guarantees

would be questionable. Technical transition and development assistance for local armament

industry is also unlikely.

If we put ourselves into the position Turkish leadership is currently in, we can somewhat

understand how their directional prerogatives change as various problems need to be

solved. Influence from migrants that fled into Turkey is completely ignored but it creates a

background of internal economic competition under the auspices of collapsing export

market outlets. Likelihood of civil conflicts expanding from current suppression attempts

by the regime in South-East is increasing. Agreements that could have allowed cooperation

were abandoned in light of attempts to re-format the regional relationships completely. Yet

the gains that were prescribed from said change of relationships are now necessary to

alleviate the strain on socio-economic actors. Re-conciliation is now a necessity instead of

an option, and yet the terms became far worse than before. There is a great need to

consolidate the body politic to generate enough cohesion in Turkey for the transition, which

we can somewhat glimpse right now. Interest groups will have to be brought to an

understanding that flexibility to placate their interests is much lower, which in my opinion

is going to be quiet unlikely. Under resource constraints nationalists, secularists, and other

–ists will press their political clout to undermine others on economic planes to gain

consolidation in various areas. Bringing objectivity to keep them all at bay away from

pressing their opponents too much, resulting in capital flight will be a very tough

proposition.

Hypothetical scenario for devaluation is as follows. Balance of payments deficit erodes

reserves closer to Forex liabilities(debt). Forex deposits in the system are taken to procure

material or service imports necessary by their owners. Banking system as a whole has

Forex outflows with Forex maturity mis-match which begins the devaluation process as

flows are directed one way to close out the maturities or purchase obligations by economic

actors externally. The crisis begins before the Forex liabilities(deposits) and borrowings

derived from them mature in the system. This can be seen in the example with Belarus. One

can see that maturities were set to be paid back after the devaluation crisis was under way.

We can also see from Malaysian example that it is possible to overcome these tumultuous

periods if one is pre-emptive in how the economy is positioned. The problem for Turkey is

at this juncture there is an attempt to foster growth and not to impede it in any way.

Towards winter if energy prices spike in regard to natural gas prices and balance of

payments begins to turn significantly negative investor confidence may begin to wane. As

curtailment of FDI gains momentum, herding impact of foreign investors will manifest in

the short term portfolio investor space, as they will begin an exodus slowly at first and the

forex flows will begin to increase outward even as balance of trade deficit shrinks. FDI was

what held up the balance of payments in 2015 (p25). FDI has turned down significantly,

if/and/or when it turns negative to cover credit used to deploy those funds in the first place,

there will be a significant strain and necessity to make tough choices on the part of Turkish

government. Pre-empting an investor exodus via the Malaysian example may be better if it

is done before their exit is underway and any psychological panics develop. Once investors

head for the exits cutting them off from an exit would create pandemonium and exacerbate

the possible impact, magnifying the damage to the Turkish economy. Dynamic in shorting

Turkish Lira Bonds in order to satisfy hedged exposure by FDI investors and portfolio

investors, especially large institutional ones, will be the prevailing headwind under a

culminating scenario, in all probability these hedges would have been established prior to

digressing macro factors influencing the flows and by cutting off the marginal investor,

Turkish gov’t would essentially strip liquidity from these instruments precipitating the

actual devaluation and rate spikes.

 

Kurdish Emergence

Kurdistan is getting closer and closer to emerging as a national entity. There are only

questions of when, how, and in what form it will emerge. Shifting foreign ties influencing

Turkey reinforce the necessity for a Kurdish entity to exist from the point of view of United

States and Europe. Not only have the Kurds been armed and organized into a fighting force

both in Syria and Iraq but they have been provided backing in some form from both U.S.

and EU. Turkish compliance thus far prevented that backing from imparting on Turkish

national interests, however, this is most likely at an end. Whether Turkey attempts to

blackmail NATO in addition to EU, no longer allows for a stable calculus in regard to its

actions. Desperation in order to cure economic, social, international, and other conflicts

simply detract from the ability to bargain in good faith and follow through on promises

provided. This has become apparent to both EU and U.S. interests in the region. Others,

Saudi Arabia, Qatar, U.K., Egypt, Jordan, etc. are coming around to view Turkish influence as

destabilizing and will most likely side with the idea of pushing them out of the region. How

that is done is another matter.

 

While, Turkey did negotiate with two out of three entities in Iraqi Kurdistan it is the

third entity which proliferated in Syria, that is on the cusp of being reinforced by foreign

interests. National emergence of a new sovereign and perhaps unified Kurdish entity

provides leverage that may be extremely long term in the region. Considering ramifications

from the military coup attempt in Turkey, long term purges in the armed forces, and

general decline in morale there would need to be a significant effort to re-integrate the rift

between the armed forces and polity at large to impede the situation from spiraling out of

control in the South-East of Turkey.

 

Syria will most likely give up the North to a new Kurdish entity under pressure from

the West. When this event occurs the ramification will be apparent to everyone. A buffer

state between Turkey and the Middle East will emerge, that will throw its’ weight into a

conflict of massive proportions, that was previously directed southward will be pushing

north. Benefits of such an entity for the West are very large. Destabilization of Turkey and

recognition of the new entity will go hand in hand, since any agreements crafted in regard

to Iraqi Kurdistan by Turkey and other Kurdish ‘isolationist’ actors will be broken.

 

One has to understand that thus far the proportions of the Syrian civil conflict were

perhaps half to a third the proportion of the possible conflict that may conflagrate Turkey.

This is based simply on the amount of forces in the region Kurds can bring to bear in sum

total and country population sizes in regard to possible contentious groups. Ergo,

approximately 300-500 thousand if one includes Syrian, Iraqi, and Turkish, Kurd

amalgamations, while a population intensity of around 20-40 million. Considering the

terrain and the possible scope and width of the area in question, the disruption would be

significant. Another influence point, that Turkey under-estimates are the possible

sanctions West could bring to bear against it, similar to what happened with Russia. This

point is completely ignored and in a sense Turkish government is quiet oblivious to such an

occurrence. In regard to forcing a solution and peace processes after the beginning of full

scale conflict, Turkey will be directed after some time by economic fallout it will be forced to

bear, especially if one overlays multiple events into single timeframes.

Kurds as an entity will have balance of power shifts that will favor their expansion(s).

Economic cooperation from the West, technical and military assistance, certain guarantees,

and the overall background of inverted situational parameters by their adversaries. It is

important to keep in mind, that just because one is an important state in the region, one is

not an irreplaceable actor. In the world of national interests irreplaceable actors don’t

exist. If one were to be objective the ability of a “Greater” Kurdistan to exist will provide

tremendous leverage to anyone whom will be given access to project power from said

entity. If one imagines having basing rights for airfields and port facilities to an entity that

is going to be dependent on your cooperation for the next two, three, or more decades to

form institutions and gain recognition and trade ties from hostile surrounding actors.

Hence the ability to shape and shift foreign policy through that foreign entity, especially if

conjunction of interests aligns over said time frames persist.

Catalysts on the horizon for acceleration of said emergence. While Turkey did go

through political turmoil and trade turmoil, it has mostly been spared a financial turmoil

that permeates a significant balance of payments crisis. It is likely that such an event will

occur in the coming few years and wreck havoc on the fragile stability that is eroding in the

business sector. Once the cumulative factors overlap they will create an impetus that is

internal in nature for separatism by the South-Eastern polity that has economic

imperatives. Imagine for a second that the Turkish national entity is under sanctions,

monetary control imposition, and social unrest. In these circumstances as the outlet to

compromise and negotiate a flexible solution is beyond reach due to internal political power

struggles, there will be only one solution for the fringe groups. That is to exit the entity.

Under such a background of cumulative constraints, being outside the system will outweigh

being part of it.

Kurds are slowly being induced in the direction of unified political field. Irrespective

of control in various regions, there is a push for an overarching position regarding

fundamental political framework that would accompany a sovereign entity. “Young Syrian

Kurds launched a new initiative on April 1 to give voice to the Kurdish youth who demand a

unified Kurdish position amongst political movements in Syria.” is one of a number of such

attempts to unify social strata. PUK-Gorran party unification in Iraq creates a platform

where an aggregation of national interests condenses the political spectrum behind itself to

create a more manageable push in directing initiatives. In light of these changes it is

apparent that “isolationist” Barzani(KDP) political entity will have to back initiatives they

have shied away from, or risk being eroded in the political spectrum. If a referendum were

to actually occur in Iraqi Kurdistan it would create a platform unto which other extra-

territorial groups could attach themselves. Either; politically, deterministically,

idealistically, or in other ways that would further their aims to carve out an entity.

 

 

 

References:

  1. http://www.dailysabah.com/economy/2016/08/11/turkeys-current-account-deficit-increases-in-june-amid-declining-tourism-revenues
  2. http://www.dailysabah.com/economy/2016/07/26/turkey-received-831-million-foreign-direct-investment-in-may
  3. https://www.imf.org/external/np/sta/ir/IRProcessWeb/data/tur/eng/curtur.htm
  4. http://www.oecd.org/economy/turkey-economic-forecast-summary.htm
  5. http://www.turkstat.gov.tr/PreHaberBultenleri.do?id=21803
  6. http://www.bloomberg.com/news/articles/2016-04-11/turkey-duels-colombia-for-safest-stock-gains-in-emerging-markets
  7. http://www.tcmb.gov.tr/wps/wcm/connect/TCMB+EN/TCMB+EN/Main+Menu/STATISTICS/Balance+of+Payments+and+Related+Statistics/Balance+of+Payments+Statisticss/Balance+of+Payments+Developments
  8. http://www.avrupa.info.tr/fileadmin/Content/Downloads/PDF/Custom_Union_des_ENG.pdf
  9. http://www.oecd.org/turkey/economic-survey-turkey.htm
  10. http://www.euractiv.com/section/enlargement/opinion/accommodating-turkey-in-esdp/
  11. https://www.newyorkfed.org/medialibrary/media/banking/international/10-07-15-Turalay-Kenc.pdf
  12. http://aei.pitt.edu/2002/1/PB05.pdf
  13. http://www.pism.pl/files/?id_plik=16619
  14. http://www.edam.org.tr/en/File?id=129
  15. http://www.bis.org/publ/bppdf/bispap54c.pdf
  16. http://cepa.org/sites/default/files/documents/Central%20Europe%20Digest,%20August%201,%202011_Zlotnikov.pdf
  17. http://www.nsi-ins.ca/wp-content/uploads/2012/09/2012-How-to-prevent-the-next-crisis-Malaysia.pdf

Kurdish Emergence References:

  1. http://www.oasiscenter.eu/articles/peoples-of-islam/2016/04/28/which-kurdistan-are-the-kurds-fighting-for
  2. http://www.reuters.com/article/us-iraq-kurds-presidency-idUSKCN0PJ1U320150709
  3. https://www.yahoo.com/news/kurds-declare-federal-region-syrias-north-officials-114048729.html?ref=gs
  4. http://www.atlanticcouncil.org/blogs/syriasource/a-kurdish-youth-initiative-to-unify-the-kurd-s-political-vision
  5. http://fpc.state.gov/documents/organization/229895.pdf
  6. http://www.al-monitor.com/pulse/originals/2016/05/iraq-kurdistan-gorran-puk-kdp-agreement.html

 

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