‘If foreign exchange earnings do not increase and expenses are not reduced, we will go bankrupt in a few months’

Much has been said lately that the reserves of the Central Bank of the Republic of Turkey (CBRT) have dwindled and that a currency crisis is at the door. Although exchange rates are increasing day by day, for now, individuals can buy foreign currency on the market and there has been no interruption in the payment of foreign debt so far. Here is the economist and faculty member of Altınbaş University professor Dr. Hayri Kozanoglu He also discussed with examples how this system works and what kind of dangers await us in the coming days, about basic concepts. Explaining the state of the Turkish economy with events that the Mehmet citizen can experience, Kozanoğlu said: “Maybe Mehmet can hold out a few more months in this situation. However, it seems inevitable that he will eventually go bankrupt unless he finds a solution that increases his income or cuts his expenses. The situation of the Turkish economy is similar to this, regarding CBRT reserves.” said. Pointing out that a publicist and populist program must be implemented that includes the rescheduling of the external debt, Kozanoğlu said that the situation of the CBRT, that is, Mehmet, is as follows:

1. Gross reserves:

Let’s say Ali has a debt of 5,000 TL. Mehmet, on the other hand, has 4,000 TL in his pocket, but he also has a debt of 14,000 TL. According to the net positions, Mehmet’s situation is worse than Ali’s because the difference between the money in his pocket and his debt is -10,000 TL. However, if a creditor comes to the door tomorrow, Ali will be in a tough spot because he has no money in his pocket. After all, Mehmet has a tampon. As his debts mature, it is possible that he will manage the creditors for a while with the money in his pocket. The CBRT situation is similar to this. It currently has gross reserves of US$99.4 billion. For now, he can work overtime with the money he has on hand, even if his obligations are higher.

2. Net reserves:

So who does Mehmet owe? He pushes his debt to the limit by flipping his credit cards. He settles his credit card debts by applying for consumer loans from time to time. In this way, he continues the game even if he is sinking into debt. The CBRT situation is similar. Banks hold some of the foreign currency deposits they collect with the CBRT as required reserves. After subtracting foreign currency deposits from domestic banks and foreign banks, special drawing rights (SDR) at the IMF, and so on, this $99.4 billion gross reserve drops to $6.4 billion net.

3. Net reserves excluding swaps:

Let’s say that Mehmet gave the ring on his finger to his brother-in-law and took the money to keep that 4,000 TL in his pocket, left his wife’s gold bracelet as a pawn and withdrew the money. In other words, he exchanged some valuable assets in his hands for cash. Likewise, CBRT buys foreign currency from national banks and gives TL; He gave TL to China for yuan and UAE for dirham. If we subtract the US$61.2 billion contained in these swap contracts, the CBRT is a net debtor, leaving another US$54.8 billion in liabilities.

4. Current account deficit:

While Mehmet has a monthly income of 9,000 TL, he spends 11,000 TL. Therefore, he covers the difference by borrowing. Even if he gets stuck, he requests the 4,000 TL in his pocket. But the money in your pocket doesn’t necessarily decrease. For example, if he borrows 5,000 TL in a month when he pays 3,000 TL, he uses his 2,000 TL to fill the income and expense gap and his pocket money increases by 1,000 TL. The current balance is also similar to this. All of a country’s foreign exchange revenues and expenditures in a given period also constitute the current account deficit (surplus). Tourism, freight income and expenses, all income and interest payments, profit transfers, etc. are included in the foreign trade deficit, which reflects all purchases and sales of goods. is added and the current account deficit value is formed. For example, in May 2022, the current account deficit was $6.5 billion. In return, $3.6 billion of funding was provided from various sources. The difference is expected to be covered by CBRT reserves, and gross reserves are expected to decrease by US$2.9 billion. But what is this? In the month in question, the bleeding in reserves was US$ 5.9 billion. The fact that these accounts are not fully maintained is called net errors and omissions. It indicates a $2.9 billion leak from somewhere we can’t explain.

5. External debt:

If our income is not enough for our expenses, we cover it with loans. In addition, we pay interest on these debts. In fact, we talked about Mehmet’s 14,000 TL debt at the beginning. Accumulated current account deficits ultimately constitute a country’s external debt. With the latest figures, Turkey’s external debt stood at US$451.2 billion by the end of the first quarter of 2022. Of this, US$238.6 billion belongs to the private sector and US$212.5 billion belongs to the private sector. public, including MB. In recent years, it has been observed that the private sector has reduced its external debt, while the public has increased it. In 2017, the private sector had a foreign debt of 311.9 billion dollars, while the public debt was 139 billion dollars. This can be compared to the rapid increase in consumer spending of, say, his daughter or son, while his credit card debt is decreasing in the Mehmet family.

6. International investment position:

All of Mehmet’s assets and debts are not limited to these. For example, he has a partnership in a shop inherited from his father. In addition, 5000 TL shares, 3000 TL crypto money investment can be found, savings can be accumulated in the individual retirement account. When we translate this into the country’s foreign currency accounts, we need to look at international investment position (IIP) statistics. All external debt obligations are included in the IIP, as well as all direct investments by foreign companies. Likewise, all assets of Turkish citizens abroad are also taken into account. Housing purchases by foreigners are also indicated in the IIP. With the latest figures from May 2021, while Turkey had liabilities of 509 billion dollars, it had 282.9 billion assets. Thus, the IYP was equivalent to US$ 226.1 billion net. The IIP deficit had risen to $442.2 billion by the end of 2017. You can rejoice in this by saying, “How wonderful our external obligations have diminished.” However, when we go into details, we understand that it is not a very pleasant situation when we see the departure of foreigners from our country, the devaluation of the LT, the devaluation of domestic assets in foreign currency, the fall of the stock market index.

7. Short-term external debts:

For Mehmet, it is also important to know the television and furniture installments, the boy’s school installments, which must be paid in the next 3 months, as well as the total debt amount. Here are Turkey’s debts due in a year, worth $182.3 billion. This includes long-term debt maturing in 1 year. This includes import debt, foreign currency and TL deposits from foreigners. While we don’t think there will be any problems here, the repayment of external loans, which we will discuss in the next article, also represents significant value.

8. External debt projections:

It is critical that Mehmet knows the bank debts that must be paid within 1 year, to apply for new loans to regulate his cash flows, and to be able to supplement with consumer loans when credit card limits are pushed. Turkey must also follow the public and private sector external debt repayment projections. By the end of 2022, $7.9 billion in short-term debt matures, of which $1.5 billion is publicly owned. Long-term debt, on the other hand, has principal and interest payments of $41.7 billion, of which $12.4 billion is publicly owned. In 2023, a foreign debt payment of 50.6 billion dollars awaits Turkey.

9. Real sector foreign exchange debts:

Mehmet may be investing his money in short-term liquid funds or repo against his overdue debt. Or, unlike Mehmet who is also in debt, Hasan is debt free and tries to get his money back using various investment opportunities. Real sector companies can also use foreign currency loans from foreign and domestic banks. Some companies may have more foreign currency assets than they owe, or they may have parked their money in foreign currency for their future debts. As of April 2022, the real sector had USD 164.6 billion of foreign currency assets and USD 269.6 billion of foreign currency debt. Thus, its net foreign exchange position gives a deficit of 105 billion dollars. This amount was US$ 187.7 billion at the end of 2017. Due to the slowdown in investments in fixed capital, companies closed their foreign exchange debts mainly with national banks. Foreign currency debt balances for domestic banks decreased from $186 billion in 2017 to $131 billion in April 2022.

If the rate of use of LT in foreign trade had not decreased, the foreign exchange reserves would not have been consumed.

10. TL and export

Since people don’t have the opportunity to print money, Mehmet doesn’t have that opportunity. However, the fact that Turkey can carry out part of its foreign trade in TL and the foreign trade deficit absorbs the CBRT’s foreign exchange reserves may alleviate the problem somewhat. The foreign trade deficit in May is 8.8 billion dollars, and the deficit in the last 12 months is 51.8 billion dollars. In 2017, before the 2018 currency crisis, which we always refer to in our examples, the rate of use of LT in foreign trade was around 8%. Now, exports made in TL have dropped below 3%. Let’s take an example: the current account deficit for the last 12 months is 30 billion dollars. 8% of this corresponds to US$ 2.4 billion. Let’s say that if 7.4 billion dollars of imports and 5 billions of exports were made with TL, there would be no need to consume foreign exchange reserves to finance the current account deficit of 2.4 billion dollars.

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