TURKEY in Deep Trouble

0:00 Hi, welcome back to Joe Blogs. In today's episode, I want to talk to you about what's happening in the economy in Turkey or Turia as it's called in Turkey. And the first thing that I want to get into is what's going on with inflation because inflation has been a persistent problem for Turkey. And as you can see from this chart, inflation has come down considerably over the last 12 months. But the important thing to note about this chart is that the scale on the right hand side does not start at zero. In fact, it starts at around 32% and goes up to around 87%. So you can see that this time last year, inflation was running at more than 75%

0:47 which is obviously an incredibly high rate. When prices are rising by 75% year on year, you need your wages to be going up by at least that in order to keep buying the same amount of food and things that you're buying year on year. But if you look at what's happened, it has come down remarkably. And the most recent data for May 25 shows that inflation is now at 35% which in relative terms is very good because it's half of what it was this time last year. But in real life terms 35% inflation is still extremely high. That hasn't been seen in most countries in the West ever. Well, maybe the odd

1:33 country has had a spike in inflation, but we get excited when inflation gets to 5% or 10% is seen to be really, really high. So, 35% is still an unmanageable amount for most people. So, it's still out of control. It needs to be brought back. And if we compare that to what's going on in the rest of the G20, because Turkey, Turkey is one of the 20 largest economies in the world, you can see that there's only Argentina that currently has a higher rate of inflation and it's at 43.5%. So 35% is still very high. And the next highest is Russia at just under 10%. And if you follow the channel, you'll know that

2:19 we've talked a lot about what's going on in the Russian economy. And inflation has seen to be out of control in Russia because its target rate is 4%. So the current rate of inflation is 2 and a half times that. If we look beyond Russia, the next highest rate is Brazil, which is just over 5%. And then everybody else in the G20 has inflation of less than 5%. And the majority are less than 3%. And if we pick out a few countries, Australia, it's 2.4 as it is in the United States. It's round about 2% at the moment in the Euro zone. And if we look at the bottom of this chart, you can see that China and Switzerland are actually experiencing deflation. Prices are going down year. So if you

3:07 take a step back and look at this in the context of the G20, 35% inflation is completely out of kilter with the rest of the large economies. So it remains a big problem from Turkeykey's point of view. And if we have a look at how it compares to the rest of the world, you can see that Turkey is in the top 10 countries of the world in terms of inflation. The only two countries at the moment that have inflation above 100% are Venezuela where the last recorded rate was 172% but that was back in April. So it may have risen since then and South Sudan which is a war torn country where it's at 113%. So this really puts into perspective the

3:53 problems that are going on in Turkey whilst inflation has come down which obviously is a step in the right direction. 35% inflation is still a major problem. And if we have a look at what's going on with interest rates, because if you've been following the channel, hopefully you're now familiar with the relationship between inflation and interest rates. But in case I need to remind you, when inflation is high, as it is in Turkey at the moment, what a central bank would normally do is to increase interest rates because that raises the cost of borrowing and also means that it makes it more attractive for people to put their money into the bank. They'll get paid a higher rate of interest on their savings. So that's broadly speaking the logic between

4:39 what's going on with interest rates and inflation. And if we have a look at what's been going on with interest rates in Turkey over the last 3 years, you can see that they started being increased in the middle of 2023. And this was actually an interesting time because prior to that, President Erdogan had been operating a contrarian policy. He basically was lowering interest rates at a time of high inflation. And what that did was caused inflation to go even higher. So interest rates have been increasing and they hit a peak of 50% in 2024 and they stayed at that level for quite a long time and as we've seen from the inflation data inflation has started coming down over the last 12 months and it was interesting that in April the

5:25 Turkish central bank decided that they needed to increase interest rates again having reduced them three times they put them back up to 46%. Now, if you think of that in the context of taking a loan, if you were to borrow $1,000 at 46% interest, then you'd have to pay $460 per year in interest on that $1,000 loan. So, you wouldn't want that loan for a long period of time. If you had that loan for 2 years and you didn't make any repayments, you just had it that you just kept paying the interest, you would actually pay back more in interest than you'd borrowed initially. So that really puts into perspective why these high rates discourage companies

6:13 and individuals from taking on debt because you would be crazy to take out a loan at 46% because you'd end up paying back far more than you'd ever borrowed. So it become counterproductive. And that's really what the Bank of Turkey is trying to achieve. It's trying to discourage anybody from taking on more debt and then investing and spending. But the problem that you get with that is that it discourages companies from expanding. It discourages people from taking on mortgages to move house or mortgages to or uh loans to go on holiday or buy a car. And so it tends to reduce consumption and investment and therefore has a negative impact on GDP. And one of the problems that Turkey has is that it needs to grow its GDP. So you

6:59 can start to understand the difficult balancing act that a central bank has and a chancellor has when they're trying to work out how to manage inflation but also to continue growing the economy. Now, if we have a look at how these interest rates compare to the rest of the G20, you can see that Turkey is right at the top of this list, its interest rate of 46%. Is even higher than Argentina, despite the fact that Argentina has a higher rate of inflation currently. And the next highest on the list is Russia, where it's currently at 20%. And I'm sure you'll be familiar with what's going on in Russia if you follow the channel. And President Putin actually wants that rate to be reduced significantly. In a recent video, I was talking about the fact that the head of

7:44 Spurbank, one of the biggest lenders in Russia, said that he believes that interest rates need to come down to around 12% in order for the Russian economy to grow and avoid recession. But the problem that Russia has is that it's inflation sitting at 10%. And that's two and a half times where the Bank of Russia wants it to be. The next highest interest rate is Brazil where it's 15% followed by Mexico it's 8 and a half South Africa 7.25 India and Indonesia 5 a half% and then everybody else in the G20 has interest rates of less than 5%. And if we look at the bottom you can see that Switzerland actually the interest rate in Switzerland is 0% and they've got deflation at the moment. So Turkey is an outlier in terms of the G20. If we

8:33 have a look at the how it compares to the rest of the world, it's the second highest rate of inflation in the world. The only country that currently has a higher rate is Venezuela where it's just under 60%. So those two statistics really put into perspective the problems that are ongoing in Turkey. It continues to have high rates of inflation, not as high as it did, but still high. and its rates of interest are off the scale. They're not manageable either. Now, if I have a look at food inflation, because that's a metric that we always like to have a look at because what's going on with food prices tells us how impacted the poor people are in any country because they're spending 80 or 90% of their disposable income on food. And it's a similar story here because last year,

9:20 this time in May in well in June 2024, food inflation was running at 70%. It's come down materially and it's now at 33% in May 25. So it's moving in the right direction, but 33% increase yearonear in food prices means that you need a 33% increase in your disposable income. So your wages less tax needs to have gone up by 33%. So if you're paying 20% tax, then you need to be getting at least a 50% pay rise just to be standing still in terms of how much food you can buy. So once again, this puts into perspective the problems in Turkey right now. And if we have a look at how that cont compares to the rest of the G20, it's the second highest rate. Argentina

10:07 is is the only country that has a higher rate of food price increases at just under 36%. Russia comes in at number three with 12 a.5% so above its actual inflation rate. Brazil is 7.3. Japan interestingly 6.5. And then all of the rest of the G20 have got food inflation of less than 5%. And at the bottom here we've got Switzerland and China where we've got deflation. So food prices are actually going down. And if we have a look at how Turkey compares to the rest of the world for food inflation, once again it's in the top 10. And the only two countries where it's above 100% are Zimbabwe and South Sudan. So the same situation as we had for actual inflation. Now what's going on with the value of the LRA is always

10:53 critical to what's happening in the Turkish economy because Turkey is a net importer. It's having to buy in fuel and food and various other essential items. And so the purchasing power of the lera is important. And if we look at what's happened to the value of the lera, this chart shows the exchange rates between the US dollar and the Turkish lera over the last 12 months. You can see that we've got virtually a straight line decline here. So this time last year, one US dollar was trading for around 33 Turkish lera. Today it's trading for around 40. So that represents a significant deterioration in value. If you expand the scale of this chart to show what's been happening over the last 5 years, you can see how seriously the

11:38 value of the LRA has declined. 5 years ago, one US dollar was trading for around four Turkish lera. Today, it's 40. So that is a complete collapse over the last 5 years. And that becomes a problem because what's happening in Turkey is that people don't want to hold their savings and their value in lera because of this deterioration in value. So a lot of people have been using the euro or the dollar or even the Chinese yuan just to get away from holding any of their assets in lera. And the problem with that is that the central bank then struggles to be able to manage the currency and manage the economy because if you move interest rates up or down but nobody's using your currency, it

12:24 doesn't have the same impact as if everybody's got their money in the bank in your currency. So that's one of the issues and the challenges that the Turkish central bank has in terms of trying to turn things around. Now, one of the things that is a major problem from Turkeykey's point of view is the increase in its producer prices because Turkey is a manufacturing country. It manufactures lots of goods in the same way as China does and then it exports those goods all around the world. And this chart shows the year-on-year movement in producer prices in Turkey over the past 12 months. What you can see here is that 12 months ago, producer prices were increasing by more than 50%. Now, that's come down significantly over the last 12 months. And the most recent data for May 25 shows that year,

13:12 producer prices increased by 23%. So, in relative terms, that's a good trend. It's a good improvement. It's half of what it was this time last year, but 23% is still very high. And if we have a look at how that compares to the rest of the G20, you can see that Turkey is the highest ranked in terms of the year-on-year increase in producer prices. The only other country that's in double figures is Argentina where it's coming in at 22%. We've then got Brazil at 7.3, Mexico at 6.8 and then everybody else in the G20 is less than 4%. And we've actually got quite a lot of countries where producer prices are reducing. So Switzerland, France, Singapore, Germany, the Netherlands, and

13:57 China are seeing yearon-year reductions in their producer prices. So you can buy things cheaper today than you could this time last year. And obviously from a competitive point of view, that puts those companies and those countries in a better position than a country like Turkey where prices are going up by 23%. Now there is a slight offset in terms of the deterioration in the value of the LRA. So the LERA has gone down by about 23%. So it's sort of offsetting it. But the problem that Turkey has is that not a lot of people are dealing in LRA. So when you're striking a deal to buy things from Turkey, you're generally doing it in euros or dollars or Chinese yuan or whatever the currency is that you want it to be. So the value of the

14:43 lera tends to be moderately irrelevant from some of those big contracts point of view. Now, if we have a look at how Turkey compares to the rest of the world, you can see that it's in the top five in terms of the increase in yearon-year movements in producer prices. So, that tells us that there are problems in Turkey, not just with internal inflation and internal demand, but also the fact that their producers are producing things more expensively than they were this time last year. And that's going to impact on the level of trade, the level of revenue, and the level of profitability for Turkish companies. And obviously that feeds through then into the Turkish economy. So what's the summary and conclusion today? Well, I wanted to post this update because we've been following

15:30 what's going on in Turkey now for almost 4 years. And what we've seen in today's video is that things are moving in the right direction. There are some positive signs. We've seen inflation h havinging from where it was this time last year. We've seen food prices coming down. We've seen the rate of growth of the producer prices also coming down. But the problem that Turkey is facing is that they're not coming down fast enough. And the actual levels involved are still really high. Turkey has one of the highest inflation rates in the G20 and the world. It also has one of the fastest rising cost of producer prices in the world and its interest rates are now at 46%. And there is only one other country, Venezuela, where interest rates

16:17 are higher. And those three metrics are causing major problems for Turkey to be able to trade its way out of the current situation. In an ideal world, Turkey would take on more contracts, its businesses, would take on more business, earn more revenue, earn more profit, and start growing organically. And that would then enable them to get their way out of the current situation. Because Turkey, as I said, is a net importer. It's still having to pay large quantities for oil and gas and food. So, it needs to start growing its GDP and earnings in order to pay for all of those imports. But the problem that it has at the moment is that the prices are increasing at such a rate that it's becoming pivotively expensive. So, it's unlikely that Turkey is going to

17:02 continue winning huge contracts. It's not going to take business away from countries like China at the moment because of the increase in the producer prices and the rate of increase of inflation in the country and food inflation is causing problems for the people of Turkey. And what we've seen in today's video is that the value of the LRA is continuing to fall every single month. In fact, every single week that means that more people are moving away from using the LRA and using the US dollar and the euro and other currencies. and that makes it very difficult for the central bank to be able to control what's going on in the economy and bring everything back to where it wanted to be. So, the overall summary of today's video is that we're seeing some improvements in Turkey. Things are moving in the right direction, but they're not it's not

17:48 happening quickly enough. Inflation is too high, producer price increases too high, and interest rates are too high at the moment. And those factors are causing the value of the LERA to continue falling. and that's causing problems for the people in Turkey and causing a dollarization issue. So hopefully you've enjoyed today's video, you found it useful, informative, and thoughtprovoking. If you've liked what I've said, then please give me a thumbs up. Thank you for watching this video all the way through to the end, then thank you so much to everyone that's supporting me. If you bought me a coffee or sent me a YouTube super thanks or signed up as a patron or a member or a buy me a coffee member, thank you for that support. Really means a lot to me. And here's something about a smile on your face.