It was in the papers this week: for the first time in history, the number of $100 bills have exceeded the number of $1 bills, and apparently, 70 percent of those $100 bills are outside the US. Why? Because people want to safeguard their hard-earned savings in climates of extreme macro policy uncertainty. Turkey is one such example, where after a brief hiatus of stability, Mr. Benjamin Franklin’s likeness is back in fashion. Why?
Remember Dr. Pangloss, that pedantic tutor in Voltaire’s satirical novella Candide? He’s a born again optimist who believes that “all is for the best in this best of all possible worlds,” an optimist with no anxieties despite facing unbeknownst calamities and cruelties. Lately it’s as if the Central Bank of the Republic of Turkey (CBRT) was sent to exile in such a panglossian parallel universe. This is quite jarring, since investors and citizens are still living in this cold and cruel universe of ours.
To celebrate its new perspective on life, the CBRT has changed its longtime stance of creative immobility and lowered its one-week repo rate 425 basis points this last week. More money for everyone. That’s a heroic step for a battered institution.
Yet the bank has gone beyond market expectations with the latest move. Turkey’s citizens haven’t made a similar shift, nor are they likely to do so anytime soon. As much as Turks like $100 bills, they will settle with the e-version, which makes things easier to keep track of. It turns out that more than half of bank deposits are still in the form of retail FX deposit accounts. In 2001, at the heels of one of modern Turkish history’s major currency crises, the share of retail FX deposit accounts of the total was 62 percent. Now it’s 52 percent. People don’t park their savings in Turkish lira accounts.
Why is there no confidence in the government’s management of the situation? It might be the rapid decline in private consumption that makes savers more cautious, prolonging the negative impact of exchange rate adjustment in 2018. That feeling of uncertainty can taint all decisions. Private consumption has declined around 8.6 percent from 2018 to 2019. Note that this decline is comparable to the similar declines during 2001 and 2008 crises, which were at 8.0 and 8.9 percent respectively. Less consumption, more caution, more demand for $100 bills.
So, how deep are policy makers into this panglossian paradise? Last week, Senator Lindsey Graham once again dangled the carrot of a Free Trade Agreement (FTA) in front of Turkey. Turks are just now in the process of understanding the role of the US Congress in American decision-making process. We always had strong friends guiding us through Capitol Hill, so didn’t have to understand the place ourselves. Yet this time, it is different. In this post S-400 world, the CAATSA has the potential to further derail US-Turkey relations, and our already fragile macroeconomic balance would only be one of many casualties of that derailment.
US administrations have always dragged their feet on FTAs with Turkey, saying how hard it would be to pass through Congress. Now a leading senator has brought it up, just when the Turkish economy badly needs an injection of confidence and vitality. This could be a good starting point to heal US-Turkey relations in a post-secondary sanctions environment.
This commentary was published in Hürriyet Daily News on 03.08.2019
