ONE of the contentious issues to come out of the meeting of G20 finance ministers in China over the weekend was whether or not the group should include any reference to the recent turmoil in Turkey in the end-of-conference communiqué. It did not, but it probably should have.
After an angry reaction by Turkey’s Deputy Prime Minister Mehmet Simsek, who attended the meeting, the offending language (“It is also important to maintain the economic and financial stability in Turkey,” one passage reportedly read) was removed, with the rest of the statement focusing on, among other things, worries about the Brexit, spreading terrorist violence, and creeping nationalism.
One of the key assertions made, and something that was highly relevant to the July 15 failed coup and its aftermath in Turkey, was the G20’s view that “excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.” In the wake of the coup attempt, the Turkish lira has lost at least six percent of its value against the US dollar, and about 10 percent of the value of the country’s stock market vanished within a couple of days.
That is by no means the extent of the country’s woes. Last week, ratings giant S&P lowered Turkey’s sovereign credit rating from BB+ to BB, two notches below investment grade, and Moody’s, which is due to announce its ratings decision by the middle of next month, is likely to do the same. That will drive a great many investors away from a country that is heavily reliant on hot money and tighten credit in its domestic market, which was already belabored by a near-7 percent inflation rate. Worse still, tourism revenue, a key economic driver for Turkey, had fallen by at least 23 percent since the beginning of the year largely due to the rash of terrorist attacks in the country even before the abortive coup, and is likely to decline even further.
The ferocious crackdown on suspected coup conspirators by the government of President Recep Tayyip Erdogan might also hamper the government’s efforts to get Turkey’s economy back on track. According to Bloomberg, on top of 246 people killed during the short-lived revolt, at least 15,000 arrested or detained, and 3.4 million public employees who face travel restrictions, at least 53,000 others have been removed from their jobs. Most are in the education sector, but among the others are 1,500 employees of the Finance Ministry, 184 from the Customs Ministry, 86 from the central bank, 62 from the Treasury, 51 from the Stock Exchange, and 32 from the Capital Markets Board.
All this matters, of course, because Turkey has for centuries been a literal bridge between Asia and Europe, and particularly so in the latter day as Europe becomes increasingly fractious and the Middle East descends into utter chaos. A stable Turkey is in a sense the guardian of Europe’s back door, and with the impending Brexit and growing protectionist jitters in the EU, a breakdown in Turkey would unleash an economic and political storm on the continent.
Less directly, it matters to our part of the world because a shake-up in until recently stable and prosperous Turkey drives investors and their money to safe havens, a flight that will only accelerate if turmoil in Turkey has an impact on countries with which it has close economic ties. The Philippines, imperfect as it is, is definitely perceived as one of those safe havens.
The great irony, however, is that there are growing signs here that this country is beginning to flounder in its own success. Just this weekend, the Bangko Sentral ng Pilipinas (BSP) downplayed suggestions that it would pursue its own objective to lower one of the region’s highest required reserve ratios (RRR) any time soon, as there is already about P1 trillion in excess liquidity sloshing around the financial system.
The country’s cash flow is evidently overwhelming its capacity to absorb it all. To the extent that any central banker can sound excited about anything, BSP Deputy Governor Diwa Guinigundo expressed a bit of frustration at the prospect of having no options other than simply moving great heaps of money back and forth between the central bank’s overnight and term deposit facilities to keep it from drowning the economy. But the number of other places in which excess money in the financial system can be made to disappear is quickly running out. The stock market, a natural repository for excess money, is considered overvalued (the current price-to-earnings ratio is beyond 20); and the real estate sector, another popular area of untrammeled spending, seems to be undergoing a bit of a pull-back out of a sense that it may have created a supply bubble.
The obvious solution, of course, is to encourage hard investment in massive development in agriculture, resource extraction, industry, and infrastructure, but these are things that take time and favorable politics to accomplish. One or two more countries like Turkey – or as I pointed out at the end of last week, places like Venezuela, Brazil, or Argentina – and we could find ourselves in a bit of jam, submerged in money looking for a place to accumulate, while at the same time losing global markets for our own investments and exports, or at least seeing them severely compromised.