Unfortunately, like most emerging market nations, Turkey’s economic boom has devolved into a dangerous bubble that is similar to the bubbles that caused the downfall of Western economies just six years ago. Though Turkey has received significant attention after its currency and financial markets fell sharply in the past year, there is still very little awareness of the country’s economic bubble itself and its frightening implications.
A little bit Ottoman history
I've you don't what the Ottoman Empire is get your lazy ass up and search it on google because I'm fucking tired and don't want to type much right now. So let's start, you've got that Ottoman Empire (what is actually called the Osman Empire but because Europeans couldn't pronounce "Osman" they just called it Ottoman), but okey you got that empire that was randomly jihading other countries, kidnapping their children and kicking ass. Unfortunatly some Christians weren't really happy with that and started to defend themselves. This created the myth that the Ottoman Empire was military defeated which is wrong YOU DUMBASSES !
The Ottoman Empire got destroyed in an economic way which I will explain now, prepare yourselves.
The Ottoman empire was state controlled where various Turkish guilds produced several products from raw materials that were available in the Ottoman Empire. Of course there was also a market were Ottomans and (first) Venetians bought and sold their goods. Nothing wrong with that ofcouse but since the other Europeans like the Dutch, French and Spanish discovered and colonised America they found large amounts of gold. This shifted the balance in the Ottoman Market, Europeans came and bought all raw materials in the Ottoman Empire which resulted that the Turkish guilds didn't produced anything. To handle this issue the Ottomans decided to tell the Europeans to fuck off from their market in order to stop them buying their raw materials.
What happened next is that there occured an enormous black market in the Ottoman Empire where traders bribed government officials so they still could sell their raw materials to the Europeans. So the production problem still wasn't fixed in fact it had become worse and another thing is that the government became corrupt. These government officials (also the jannesaries) were in the beginning of the Ottoman Empire chosen because of their skill, since they became corrupt they started to ask more. For example the Jannesaries weren't allowed to have children or even to marry, from time to time even their kids fulfilled their fathers role as a jannesarry. This eventually led to the fact that the Ottoman Empire turned from a meritocraty to an autocracy while Europe was changing from a autocraty to a meritocraty.
This new autocracy used their money they earned to sell raw material to the Europeans to buy luxury goods from them thinking that they werere rich untill the system collapsed when they realised they had no money anymore and that the Europeans made al the profit.
What's the link ?
Since Mustafa Kemal Ataturk founded the Turkish Republic he nationalised the Turkish economy to a more socialist economy. Socialism is great but you need to have good organisers which had ran out since his death. Turkey remained a socialist country until 1980. Where right winged officers (supported by the USA) commited a coup to bring back stability to the country. 1980 was also the time when Turkey experimented with the concept of a free market economy. In 2000 the minister of the Liberal Demokratik parti in Turkey brought Turkey into a more liberal free market economy which Erdogan would continue when he occured victorious in 2002.
Like many other emerging nations, Turkey’s economic boom since the financial crisis has been heavily predicated upon a combination of foreign “hot money” inflows, ultra-low interest rates across the yield curve, rapid credit growth, and soaring asset prices. The charts of Turkey’s benchmark interest rate and three-month interbank rate show how they were cut to all-time lows in the years following the financial crisis:
What happened next is that there occured an enormous black market in the Ottoman Empire where traders bribed government officials so they still could sell their raw materials to the Europeans. So the production problem still wasn't fixed in fact it had become worse and another thing is that the government became corrupt. These government officials (also the jannesaries) were in the beginning of the Ottoman Empire chosen because of their skill, since they became corrupt they started to ask more. For example the Jannesaries weren't allowed to have children or even to marry, from time to time even their kids fulfilled their fathers role as a jannesarry. This eventually led to the fact that the Ottoman Empire turned from a meritocraty to an autocracy while Europe was changing from a autocraty to a meritocraty.
This new autocracy used their money they earned to sell raw material to the Europeans to buy luxury goods from them thinking that they werere rich untill the system collapsed when they realised they had no money anymore and that the Europeans made al the profit.
What's the link ?
Since Mustafa Kemal Ataturk founded the Turkish Republic he nationalised the Turkish economy to a more socialist economy. Socialism is great but you need to have good organisers which had ran out since his death. Turkey remained a socialist country until 1980. Where right winged officers (supported by the USA) commited a coup to bring back stability to the country. 1980 was also the time when Turkey experimented with the concept of a free market economy. In 2000 the minister of the Liberal Demokratik parti in Turkey brought Turkey into a more liberal free market economy which Erdogan would continue when he occured victorious in 2002.
Like many other emerging nations, Turkey’s economic boom since the financial crisis has been heavily predicated upon a combination of foreign “hot money” inflows, ultra-low interest rates across the yield curve, rapid credit growth, and soaring asset prices. The charts of Turkey’s benchmark interest rate and three-month interbank rate show how they were cut to all-time lows in the years following the financial crisis:
Turkey’s Economic “Miracle” Is Driven By A Credit Bubble
Ultra-low interest rates are, of course, notorious for creating temporary economic booms that are driven by credit and asset bubbles – a fact that likely wasn’t lost on Erdoğan, who vowed to make Turkey one of the world’s ten largest economies by 2023. Loans to Turkey’s private sector have more than quadrupled since 2008, even though the country’s real GDP only increased by approximately a third (and a good portion of that GDP increase was driven by debt):
Ultra-low interest rates are, of course, notorious for creating temporary economic booms that are driven by credit and asset bubbles – a fact that likely wasn’t lost on Erdoğan, who vowed to make Turkey one of the world’s ten largest economies by 2023. Loans to Turkey’s private sector have more than quadrupled since 2008, even though the country’s real GDP only increased by approximately a third (and a good portion of that GDP increase was driven by debt):
The emerging markets bond bubble enabled a corporate borrowing spree that caused Turkey’s external debt, or debt owed to foreign creditors, to surge to a record high of U.S.$372.6 billion or nearly 47 percent of the country’s GDP:
90 percent of Turkish corporate debt is denominated in foreign currencies, which dangerously exposes the country’s corporate borrowers to weakness in the Turkish lira currency, which is down by over 18 percent against the U.S. dollar in the past year:
Even more worrisome is the fact that U.S. $129.1 billion, or just over a third, of Turkey’s external debt is short-term debt that will come due in the next year, which is a sharp increase from the country’s short-term external debt of U.S. $100.6 billion at the end of 2012, and U.S. $52.52 billion external debt in 2008. Turkey’s short-term and long-term external debt have both increased at a faster rate than economic growth in the past half-decade. Having a large stock of short-term external debt makes economies more vulnerable to rising interest rates, as many emerging market nations have experienced in the past year after the U.S. Federal Reserve’s QE taper plans surfaced. Turkey’s short-term external debt burden exceeds 100 percent of its currency reserves, making it one of the highest risk emerging economies based on this metric.
One of the reasons for Turkey’s rapid accumulation of external debt in the past decade has been the need to finance its growing current account deficit, which the country’s economy has become increasingly reliant upon to continue growing:
Turkey’s Consumption Boom Is Actually A Bubble
Accounting for 70 percent of Turkey’s GDP, consumer spending has been the country’s primary engine of economic growth in the past decade. Unfortunately, much of this consumer spending has been financed by debt, as with many other areas of Turkey’s economy. Personal loans grew at a scorching 61 percent average annual rate from 2005 to 2008 and barely slowed down after the financial crisis, while loans to households were increasing at a 28 percent annual rate in 2013. Credit is so free-flowing in Turkey that consumers are even able to receive approvals for personal loans via text message and ATM machines.
In addition to personal loans, credit card debt has played a significant role in enabling Turkey’s consumption boom, with credit card loans from the country’s leading banks having risen by 77 percent from 2010 to mid-2013. Turkey’s 74 million citizens now own 57 million credit cards and carry approximately $45 billion in outstanding credit card debt – nearly a third of which is considered to be nonperforming. Turkish consumers’ embrace of debt-driven consumption has caused household debt as a proportion of disposable income to rocket from 4.7 percent in 2002 to 50.4 percent in 2012.
As is common in low interest rate and credit bubble environments, Turkey’s consumption boom has been abetted by a savings rate that has fallen to its lowest level in at least three decades, which places Turkey dead last among fourteen other developing countries for this metric. An IMF study found that the average developing country has a savings rate of 33.5 percent, which is nearly triple Turkey’s 12.6 percent savings rate.
The combination of Turkey’s falling savings rate and credit binge has helped to propel the country’s consumer spending to an all-time high in the past decade:
Construction Plays A Key Role In Turkey’s Bubble
Construction is one of the most common drivers of economic activity during bubbles, and Turkey’s bubble economy is no exception to this pattern. Now accounting for $170 billion or approximately 20 percent of Turkey’s $789.3 billion economy (when including related activities), construction of all types have been booming, particularly construction of residential buildings, malls, hotels, skyscrapers, airports and other massive infrastructure projects. Growing by 42.9 percent in 2013, construction-related loans are a major component of Turkey’s overall credit bubble.
Since 2008, 39 new skyscrapers have been completed in Turkey, and there are 42 more skyscrapers currently under construction. After its completion in 2011, the 856-foot tall Istanbul Sapphire became both Turkey and Europe’s tallest building outside of Russian territory. Turkey’s skyscraper construction frenzy is a reason for alarm according to the Skyscraper Index, which posits that many of history’s worst economic crises – including the Great Depression and 1997 Asian financial crisis – were preceded by the building of record-breaking skyscrapers.
Skyscraper booms and economic bubbles go hand-in-hand because excessive optimism combined with the availability of cheap credit leads to wildly ambitious, “pie in the sky” business decisions that are later regretted when the boom inevitably turns into a bust. Turkey’s skyscraper mania is funded in large part by the risky short-term U.S. dollar-denominated loans that were discussed earlier. Property development conglomerate Kiler Group – which owns the Istanbul Sapphire – had 164 million liras worth of debt in 2013, 154 million liras of which are U.S. dollar-denominated loans. Property development firms that have large amounts of dollar-denominated loans are dangerously exposed to adverse moves in the Turkish lira’s exchange rate against the U.S. dollar.
Shopping mall development is another important facet of Turkey’s construction bubble: Turkey had only 46 malls in 2000, but now has over 300, and there are plans to build at least 300 more in the next decade. 1.5 million square meters of shopping space is expected to come online in 2014, representing an 18 percent increase in Turkey’s total shopping mall space. Turkey’s mall construction bubble is being encouraged by the country’s unsustainable credit-driven consumer spending boom that was discussed earlier.
As with malls, there has been an explosion of new hotels built in Turkey in the past decade, and many more are in the pipeline. In the next three years, 65 new four and five star hotels with a total number of 38,853 beds are expected to be completed. Western hotel companies have been clamoring to get a piece of the hotel bubble action: Hilton Worldwide had 20 hotels under construction in 2013, Radisson has 15 Park Inn properties planned, while Wyndham has 9 more Ramadas, an additional Wyndham, and 20 Super 8 hotels planned, to name just a few examples. According to Mehmet Onkal of BDO Hospitality Consulting, 95 percent of Turkey’s hotel projects are funded by local investors.
Ambitious government-led infrastructure projects have been a significant driver of Turkey’s construction activity and economic growth as well. Prime Minister Recep Tayyip Erdoğan is the mastermind behind Turkey’s decade-long, $200 billion construction plan that includes mega projects such as:
-A third airport in Istanbul that is expected to be one of the world’s largest when it opens in 2019. Costing an estimated $29 billion, this is currently Turkey’s most expensive mega project
-A 26-mile shipping canal to link the Marmara and the Black Sea, which is expected to cost $15 billion
-A 24-tower public-private real estate development that will contain approximately 5,000 luxury apartments, at a cost of $8.4 billion
-A $5 billion rail tunnel that will run under the Bosporus
-A third bridge across the Bosporus that will cost $4.4 billion
-A $2.6 billion financial center complex for the central bank, financial regulators, and private financial firms
-A $2.5 billion luxury high-rise that includes a hotel, a new mall, office space, and a spacious performing arts center
-A large new tunnel under the Bosporus that will cost $1.4 billion
-A $1.35 billion development with two marinas, two five-star hotels, a massive mall, and a 1,000-capacity mosque
-A $700 million ship port, along with luxury hotels and offices
-A $180 million luxury hotel and office skyscraper called the Diamond of Istanbul that will replace the Istanbul Sapphire as Turkey’s tallest building when completed
Public construction projects are the primary reason why Turkey’s government spending has increased by nearly two-thirds in the past decade:
How Turkey’s Economic Bubble Will Pop
Turkey’s economic bubble is likely to pop as a result of rising short and long-term interest rates, and may coincide with the popping of the overall emerging markets bubble. As the U.S. Federal Reserve follows through with its QE taper – which is expected to be completed this year – the flow of “hot money” to emerging markets will reverse, which will cause those countries’ currencies to decline and bond yields to climb. Turkey’s $129.1 billion short-term external debt that will come due over the next year is an additional related catalyst that will likely contribute to the popping of the country’s bubble.
-The country’s runaway credit boom will turn into a bust
-Countless construction and property development projects will turn sour
-Many banks and property developers will go under
-Many corporations that have large foreign currency debts will default
-Over-leveraged consumers will default on their debts
-Economic growth will go into reverse
-Government and corporate debt downgrades by rating agencies
-Property, the lira currency, stock, and bond prices will fall significantly, leading to higher interest rates
-Political backlash against the current leaders and more public protests
-Credit
-Driven construction and consumption have been Turkey’s two main engines of economic growth in the past decade, and the inevitable ending of those unsustainable booms will leave the country without a viable source of growth. The popping of the overall emerging markets bubble will likely lead to a crisis that is worse than the 1997 Asian financial crisis because more countries are involved (Latin America, China, and Africa) this time, and because the global economy is in a much weaker state now than it was during the booming late-1990s.
I will end this report with my favorite quote from economist Ludwig Von Mises:
90 percent of Turkish corporate debt is denominated in foreign currencies, which dangerously exposes the country’s corporate borrowers to weakness in the Turkish lira currency, which is down by over 18 percent against the U.S. dollar in the past year:
One of the reasons for Turkey’s rapid accumulation of external debt in the past decade has been the need to finance its growing current account deficit, which the country’s economy has become increasingly reliant upon to continue growing:
Consumption
Turkey’s Consumption Boom Is Actually A Bubble
Accounting for 70 percent of Turkey’s GDP, consumer spending has been the country’s primary engine of economic growth in the past decade. Unfortunately, much of this consumer spending has been financed by debt, as with many other areas of Turkey’s economy. Personal loans grew at a scorching 61 percent average annual rate from 2005 to 2008 and barely slowed down after the financial crisis, while loans to households were increasing at a 28 percent annual rate in 2013. Credit is so free-flowing in Turkey that consumers are even able to receive approvals for personal loans via text message and ATM machines.
In addition to personal loans, credit card debt has played a significant role in enabling Turkey’s consumption boom, with credit card loans from the country’s leading banks having risen by 77 percent from 2010 to mid-2013. Turkey’s 74 million citizens now own 57 million credit cards and carry approximately $45 billion in outstanding credit card debt – nearly a third of which is considered to be nonperforming. Turkish consumers’ embrace of debt-driven consumption has caused household debt as a proportion of disposable income to rocket from 4.7 percent in 2002 to 50.4 percent in 2012.
As is common in low interest rate and credit bubble environments, Turkey’s consumption boom has been abetted by a savings rate that has fallen to its lowest level in at least three decades, which places Turkey dead last among fourteen other developing countries for this metric. An IMF study found that the average developing country has a savings rate of 33.5 percent, which is nearly triple Turkey’s 12.6 percent savings rate.
The combination of Turkey’s falling savings rate and credit binge has helped to propel the country’s consumer spending to an all-time high in the past decade:
Construction Plays A Key Role In Turkey’s Bubble
Construction is one of the most common drivers of economic activity during bubbles, and Turkey’s bubble economy is no exception to this pattern. Now accounting for $170 billion or approximately 20 percent of Turkey’s $789.3 billion economy (when including related activities), construction of all types have been booming, particularly construction of residential buildings, malls, hotels, skyscrapers, airports and other massive infrastructure projects. Growing by 42.9 percent in 2013, construction-related loans are a major component of Turkey’s overall credit bubble.
Since 2008, 39 new skyscrapers have been completed in Turkey, and there are 42 more skyscrapers currently under construction. After its completion in 2011, the 856-foot tall Istanbul Sapphire became both Turkey and Europe’s tallest building outside of Russian territory. Turkey’s skyscraper construction frenzy is a reason for alarm according to the Skyscraper Index, which posits that many of history’s worst economic crises – including the Great Depression and 1997 Asian financial crisis – were preceded by the building of record-breaking skyscrapers.
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| Istanbul Skyline |
Skyscraper booms and economic bubbles go hand-in-hand because excessive optimism combined with the availability of cheap credit leads to wildly ambitious, “pie in the sky” business decisions that are later regretted when the boom inevitably turns into a bust. Turkey’s skyscraper mania is funded in large part by the risky short-term U.S. dollar-denominated loans that were discussed earlier. Property development conglomerate Kiler Group – which owns the Istanbul Sapphire – had 164 million liras worth of debt in 2013, 154 million liras of which are U.S. dollar-denominated loans. Property development firms that have large amounts of dollar-denominated loans are dangerously exposed to adverse moves in the Turkish lira’s exchange rate against the U.S. dollar.
Shopping mall development is another important facet of Turkey’s construction bubble: Turkey had only 46 malls in 2000, but now has over 300, and there are plans to build at least 300 more in the next decade. 1.5 million square meters of shopping space is expected to come online in 2014, representing an 18 percent increase in Turkey’s total shopping mall space. Turkey’s mall construction bubble is being encouraged by the country’s unsustainable credit-driven consumer spending boom that was discussed earlier.
As with malls, there has been an explosion of new hotels built in Turkey in the past decade, and many more are in the pipeline. In the next three years, 65 new four and five star hotels with a total number of 38,853 beds are expected to be completed. Western hotel companies have been clamoring to get a piece of the hotel bubble action: Hilton Worldwide had 20 hotels under construction in 2013, Radisson has 15 Park Inn properties planned, while Wyndham has 9 more Ramadas, an additional Wyndham, and 20 Super 8 hotels planned, to name just a few examples. According to Mehmet Onkal of BDO Hospitality Consulting, 95 percent of Turkey’s hotel projects are funded by local investors.
Ambitious government-led infrastructure projects have been a significant driver of Turkey’s construction activity and economic growth as well. Prime Minister Recep Tayyip Erdoğan is the mastermind behind Turkey’s decade-long, $200 billion construction plan that includes mega projects such as:
-A third airport in Istanbul that is expected to be one of the world’s largest when it opens in 2019. Costing an estimated $29 billion, this is currently Turkey’s most expensive mega project
-A 26-mile shipping canal to link the Marmara and the Black Sea, which is expected to cost $15 billion
-A 24-tower public-private real estate development that will contain approximately 5,000 luxury apartments, at a cost of $8.4 billion
-A $5 billion rail tunnel that will run under the Bosporus
-A third bridge across the Bosporus that will cost $4.4 billion
-A $2.6 billion financial center complex for the central bank, financial regulators, and private financial firms
-A $2.5 billion luxury high-rise that includes a hotel, a new mall, office space, and a spacious performing arts center
-A large new tunnel under the Bosporus that will cost $1.4 billion
-A $1.35 billion development with two marinas, two five-star hotels, a massive mall, and a 1,000-capacity mosque
-A $700 million ship port, along with luxury hotels and offices
-A $180 million luxury hotel and office skyscraper called the Diamond of Istanbul that will replace the Istanbul Sapphire as Turkey’s tallest building when completed
Public construction projects are the primary reason why Turkey’s government spending has increased by nearly two-thirds in the past decade:
How Turkey’s Economic Bubble Will Pop
Turkey’s economic bubble is likely to pop as a result of rising short and long-term interest rates, and may coincide with the popping of the overall emerging markets bubble. As the U.S. Federal Reserve follows through with its QE taper – which is expected to be completed this year – the flow of “hot money” to emerging markets will reverse, which will cause those countries’ currencies to decline and bond yields to climb. Turkey’s $129.1 billion short-term external debt that will come due over the next year is an additional related catalyst that will likely contribute to the popping of the country’s bubble.
Here is what to expect when Turkey’s economic bubble truly pops:
-The country’s runaway credit boom will turn into a bust
-Countless construction and property development projects will turn sour
-Many banks and property developers will go under
-Many corporations that have large foreign currency debts will default
-Over-leveraged consumers will default on their debts
-Economic growth will go into reverse
-Government and corporate debt downgrades by rating agencies
-Property, the lira currency, stock, and bond prices will fall significantly, leading to higher interest rates
-Political backlash against the current leaders and more public protests
-Credit
-Driven construction and consumption have been Turkey’s two main engines of economic growth in the past decade, and the inevitable ending of those unsustainable booms will leave the country without a viable source of growth. The popping of the overall emerging markets bubble will likely lead to a crisis that is worse than the 1997 Asian financial crisis because more countries are involved (Latin America, China, and Africa) this time, and because the global economy is in a much weaker state now than it was during the booming late-1990s.
I will end this report with my favorite quote from economist Ludwig Von Mises:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
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