Turkey: The Bother with Debt-Pushed Progress


Turkey has loved sturdy financial progress over the past 20 years. Sadly, a lot of this enlargement has been pushed by debt-fueled infrastructure spending. This extreme debt accumulation has had vital repercussions which have created extreme imbalances in Turkey’s financial system.

As the worldwide financial outlook has deteriorated within the face of rising inflation, the continued pandemic, and geopolitical instability, the headwinds Turkey is going through have solely grown stronger. In consequence, the nation’s present financial disaster is prone to intensify additional.

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Infrastructure-Pushed Progress

After a “misplaced decade” within the Nineteen Nineties, Turkey launched into a protracted interval of strong financial progress. Certainly, its GDP expanded at an annual fee of 4.6% from 2002 to 2020. Nonetheless, this enlargement was not generated by its ordinary driver — family consumption — however by infrastructure spending and different capital expenditures. Whereas this boosted progress, it additionally saddled the financial system with a number of long-term issues:

1. Excessive and Rising Financial Imbalances

Turkey adopted free financial and financial insurance policies to gasoline its financial enlargement. That progress was achieved, however excessive inflation and extreme debt got here with it. Turkey’s CPI rose to an astounding 54.4% in February 2022 and remains to be climbing. This has lowered shopper buying energy and the general competitiveness of Turkish business, to not point out the worth of the Turkish lira.


Turkey’s CPI, 12 months over 12 months

Chart showing Turkey's CPI (YOY)
Sources: TUIK, Earthen Avenue Capital

2. Elevated Debt

Turkey’s GDP progress has been facilitated by extreme leverage. The nation’s gross non-financial-sector debt has greater than quadrupled, rising from $211 billion in 2000 to $871 billion in 2020. By comparability, the nation’s GDP solely expanded by 270% in US greenback phrases. As a consequence, the whole debt burden of the financial system elevated from 77% of GDP in 2000 to 129% in 2020.


Turkey’s Non-Monetary-Sector Debt as a Proportion of GDP

Chart showing Turkey's Non-Financial Sector Debt (As a Percentage of GDP)
Sources: BIS, Earthen Avenue Capital

Furthermore, a lot of this debt originates from international sources: The nation’s complete exterior debt provides as much as roughly 60% of GDP. For a rustic operating on twin deficits, this debt trajectory is unsustainable.

3. Weak point in Conventional Financial Drivers

Turkey’s infrastructure spending hasn’t benefitted different sectors of its financial system all that a lot. The nation’s main financial driver, family spending, has really weakened throughout the 20 years of enlargement, falling from 69% of GDP within the first quarter of 2000 to 55% of GDP in 2020.


Turkey’s Gross Mounted Capital Formation and Private Consumption Expenditures as a Proportion of GDP

Chart Showing Free Cash Flow and Personal Consumption Expenditures as a Percentage of Turkey's GDP
Sources: TUIK, Earthen Avenue Capital

Internet exports have additionally stagnated as a proportion of GDP. In consequence, the financial system has change into much more depending on infrastructure spending and increasing debt.

An Unsustainable Path

Turkey’s financial mannequin hinges on the provision of straightforward credit score, whatever the nation’s capacity to repay it. Amid the darkening world outlook and the worsening home state of affairs, that credit score is not going to be so available. And that can solely additional warp Turkey’s financial system.

With the speedy decline within the lira, the nation’s exterior debt is already rising costlier, and amid financial tightening in the US and Europe, credit score can be more durable and more durable to come back by.


Turkey’s Present Account Steadiness as a Proportion of GDP

Chart showing Turkey's Current Account Balance as a Percentage of GDP
Sources: IMF, Earthen Avenue Capital

Rampant inflation, a heavy debt load, and excessive unemployment imply that the Turkish financial system faces appreciable instability. In the meantime, shopper spending is falling and the nation’s financial competitiveness appears to be declining because it trades much less with developed markets and extra with rising markets.

Persevering with on the present debt-driven progress path will solely exacerbate Turkey’s issues: Certainly, it might result in a deeper recession or, even worse, extended stagflation. Exterior occasions like rising inflation and the Russia–Ukraine Warfare will represent additional drags on Turkish progress.

Earlier financial crises in Turkey in 1958 and within the Nineteen Seventies and Nineteen Nineties adopted an analogous sample of extreme inflation, elevated present account deficits, and a cratering lira. Historical past suggests a necessity for warning.

Tile for Puzzles of Inflation, Money, and Debt: Applying the Fiscal Theory of the Price Level

Authorities Is Not Serving to

The Turkish authorities’s financial insurance policies don’t point out the required course correction is being made. The nation’s leaders look to be prioritizing political aims over financial stability. Furthermore, a scarcity of impartial establishments makes a balanced coverage harder to realize.

A Cautionary Story?

Turkey’s financial progress path gives a lesson for different creating nations that depend upon debt for progress: An overreliance on leverage creates financial distortions that may have profound penalties.

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All posts are the opinion of the creator. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially mirror the views of CFA Institute or the creator’s employer.

Picture credit score: ©Getty Photographs/Sami Sert


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Dhruv Goyal, CFA

Dhruv Goyal, CFA, is the founding father of Earthen Avenue Capital. He focuses on world macro analysis, and sovereign bond and foreign money investments. He has greater than 15 years expertise within the business and has beforehand labored with Nationwide Insurance coverage, Wisconsin Alumni Analysis Basis, and CUNA Mutual Group in the US. He holds an MBA from College of Wisconsin-Madison and is a CFA charterholder.



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