Why Türkiye Is Not Fixing It's Hyperinflation Problem | Economics Explained

all right time to add another country to the  list of places i am not allowed to travel   this is turkey or turkey because they decided  to change their name a few hours before i   started recording this video anyway turkey a  simply stunning country filled with history   culture and some of the most beautiful scenery  you have ever seen it's no surprise that up   until recently turkey was one of the most popular  tourist destinations in the world which went a   long way to fueling the massive economic growth  the nation experience between the year 2000   and the mid-2010s if i was making this video just  five years ago i would be telling the story of   an up-and-coming economic powerhouse that could  geographically and culturally be the link between   the riches of the middle east and the advanced  economic systems of europe turkey is the 21st   largest economy in the world by gdp and 11th when  adjusted for purchasing power parity which is why   it's all the more concerning that severe economic  and political mismanagement is threatening to   unravel all the progress the country has made in  the past two decades for those of you who haven't   been following the news the country is currently  experiencing extremely high levels of inflation   which is subjecting the citizens of the nation  to almost daily price increases for products that   they need to survive the most unfortunate part of  this entire ordeal is that it's almost entirely   preventable and a few simple measures could put  it back on track to prosperity very quickly but   unfortunately it looks like the government of the  nation is unwilling to take these steps for a few   important reasons so why is the value of the  turkish lira falling so rapidly all of a sudden   what impacts will this inflation have on the  country's economy why isn't the turkish government   taking the widely suggested steps to alleviate  this issue and finally could this be a sign of   things to come in our own economies once we have  answered all of these questions we can put turkey   on the economics explained national leaderboard  this episode of economics explained was brought to   you by skillshare another year is coming to an end  and if you're anything like me you are probably in   the process of setting up a new year's resolution  which you will give up on the moment it becomes   slightly inconvenient the reason i find this  happens is because learning new things and then   applying that knowledge in a useful way is hard  this is where skillshare comes in for those of   you who don't already know skillshare is an online  library where you can learn pretty much anything   and you can learn it from people who are true  masters of their craft if your goal for 2022 is to   never see the inside of an office ever again and  continue the work from home dream then skillshare   has an endless library of highly marketable skills  which you can do from anywhere in the world with   a laptop and an internet connection even if  you do like your day job learning new skills   is a great way to keep your mind active and sharp  the best part is if you use the link in the video   description you can gain access to skillshare  premium for free for the first month so if your   new year's resolution involves learning a new  skill of any kind you'd be silly not to give it   a go now before we get into the inflation crisis  in turkey i need to make the big disclaimer this   is an ongoing issue which is changing rapidly  every day case in point the country literally   decided to change its name as i was writing this  script although i'm still going to call it turkey   because i'm not entirely convinced that this isn't  some kind of elaborate prank anyway this is also   a crisis with huge political stakes which means  that some announcements and even some economic   figures could be more motivated by political power  than the pursuit of accuracy but with that out of   the way turkey is no stranger to inflation in  the 1980s and the 1990s the country experienced   inflation rate spikes as high as 140 percent the  first spike was caused by the country loading up   on foreign debt to fuel rapid growth during the  1970s this caused the economy to effectively   overheat while the government ran massive account  deficits the idea was the country could just grow   its way out of this debt by becoming an export  powerhouse which on the surface wasn't the worst   idea ever the problem was that the government was  borrowing money in foreign currencies which meant   that these loans needed to be repaid in the same  foreign currencies this dangerous balancing act of   living loan to loan came crashing down when  oil prices skyrocketed during the mid-1970s   at this point turkey was heavily dependent  on imported oil to keep its economy going   and it was only just keeping its head above water  before this price hike the government did its   best to counter these issues with stimulus  measures but all it really did was devalue   the currency and because the nation's debts  were primarily denoted in foreign currencies   it became harder and harder to repay these loans  with domestic money which was worth significantly   less every day that passed the country continued  to struggle with inflation that hovered around 60   for the next two decades before establishing new  mandates from the central bank in the early 2000s   before this time the turkish central bank  basically did what the government told them to do   if the government needed more money to finance  infrastructure spending the treasury would call   the central bank and it would be more or less  as simple as that the reforms of 2001 changed   up this status quo significantly the headline  issue was that the central bank's core mandate   would be on price stability it could also help  the government with growth and employment but   only if that did not come at the expense of stable  prices there are also some other significant   changes made such as forbidding the central bank  to buy government-issued bonds in primary markets   for reference this is how the treasury  normally raises money in the united states so   banning this exchange was a big deal it meant that  if the government wanted to borrow money it needed   to borrow it from investors who would likely be  a lot more careful about how much they lent out   since they didn't have the advantage of being able  to print more money if it never comes back to them   these reforms sent a message that turkey  was going to be on its best behaviour   no more double-digit inflation no more defaults  after gaining this autonomy the central bank went   to work jacking up interest rates to as high  as a hundred percent for a brief period in an   attempt to stabilize inflation this also cut down  on the amount of new cash been introduced into the   economy and simultaneously made turkey somewhere  that people wouldn't mind putting their money   unfortunately there is not much a central bank  can do to put the inflation genie back into the   bottle once it's out decades of double-digit  inflation meant that the lira's face value   was extremely low this by itself isn't normally  a huge problem the japanese yen for example   is still a perfectly acceptable currency  even though one yen is worth less than one   percent of one american dollar it's just that  in turkey's case the difference was too severe   it made it difficult to transact internationally  it also gave the currency somewhat of a negative   stigma if someone hands you a 10 million note you  are instinctively not gonna take it very seriously   to solve this issue turkey released the new lira  in 2005 which was exchangeable for the old lira   at a rate of 1 to 1 million respectively this new  monetary stability alongside relative political   stability was what allowed the nation to grow so  rapidly in the past two decades turkey does not   have huge reserves of oil or gas it does have  some oil fields but they are small and don't   even meet the demand of the country itself as  such turkey is a net importer of fossil fuels   while this means that the country misses out on  easy oil riches we have seen time and time again   that this can actually be a blessing in disguise  it removes the temptation to just become an oil   state it also means that turkey's growth was built  upon more sustainable industries that added value   beyond pumping or digging stuff out of the ground  turkey is part of a customs union with the eu   which has meant that it has been able to trade  freely and receive investment from countries   within europe because of this it has built at a  strong industrial base in a short amount of time   it has a surprisingly large automotive industry  where it's able to combine its comparatively cheap   yet highly skilled workforce with its geographic  proximity to major markets in the middle east and   europe it has also up until recently been a major  tourist hotspot in 2019 it welcomed 51 million   international tourists which puts it ahead of  places like mexico thailand germany and even   the uk tourism is a fantastic industry because it  literally amounts to people flying into a country   spending piles of money and then flying out again  it doesn't rely on depletable resources and it   doesn't even require trade deals it's easy to  see why turkey was such a popular destination too   it has amazing historical sites breathtaking  natural beauty good travel infrastructure and   it's relatively affordable it's also a popular  way for western tourists to experience middle   eastern culture and customs without stepping  too far outside of their comfort zone or   too far into regions that are perceived to be  dangerous whether that perception be true or not   so turkey had a lot going for it a great  geographic position developing industrial and   tourism sectors all backed up by a self-governing  currency that was seemingly under careful control   the government had also overseen this growth while  doing a very good job of avoiding debt whether   it be through fiscal discipline or whether it be  through self-imposed borrowing restrictions that   placed on itself turkish national debt has stayed  well below 50 of gdp since the early 2000s so   where did this all go wrong the current issues  of the nation is facing really got started   around five years ago in 2014 risa bertowan  was elected president running on a platform of   conservative populism he is also shown to be  a supporter of the ideals of islamic finance   a brief rundown of this system is that typical  interest-bearing assets are forbidden because   they are deemed by the faith as usury to kind of  skirt around these rules islamic banks will set   up savings accounts where depositors share in  the profits of the bank and borrowers will rent   to own the assets that they buy if you wanted  a mortgage for example the bank would buy the   house that you're interested in and then you would  rent it from them at an inflated rental price for   30 years until one day the bank would agree to  just give you the house some say this is just   interest by another name some say this is a very  important way to make sure interest recipients   have a shared interest in the underlying asset  i'll leave that one up to the comments section   to work out for now the details aren't important  and all you need to take away from this is that   interest is bad in the eyes of turkey's president  this has become important because starting in 2017   turkey discovered that it might have a bit of a  problem on its hands while government borrowing   has been very modest the private sector has been  taking on more and more debt to capitalize on the   rapid growth of the nation all the new industries  that we just looked at needed to be financed   but the new highly regulated central bank  was very tight-fisted with its new currency   this led many large institutions to simply borrow  money from countries like germany and the uk   which had the added benefit of attracting much  lower interest rates like all highly leveraged   positions the good times in turkey were great this  private sector borrowing created tremendous wealth   very quickly but like all highly leveraged  positions the bad times are terrible these   issues came to a head in 2016 when turkey's  bid to upgrade itself from a trading partner   of the eu to a fully fledged eu member state was  overwhelmingly knocked back primarily due to human   rights concerns centered around the country's  new president this made foreign financial   institutions think twice before lending money and  tourists think twice before planning a holiday   as these revenue sources dried up a lot of private  companies started closing because they were unable   to meet their debt obligations this was made  worse by the lira's price dropping drastically   making the loans denoted in foreign currency  comparatively more expensive the government's   solution to this was to raise interest rates  and introduce austerity measures to get their   currency back on track and this worked but at  great cost the unemployment rate in the nation   skyrocketed to 14 which was the highest it had  been since the introduction of the new currency   these heightened interest rates did help the large  companies trying to pay back their foreign debts   it did this by making the lira more valuable  in foreign exchange markets meaning the foreign   currency debts were comparatively less expensive  but it also hurt the average turk who now had   to compete in the hardest job market of their  professional careers erdogan won his election   on a populist platform and many saw this interest  rate increase in 2018 as a way to save large debt   riddle companies by sacrificing the common man  this issue came back with a vengeance in 2020 as   the companies that survived the first debt crisis  we're now facing the economic implications of the   coronavirus remember turkey is heavily dependent  on heavy manufacturing and tourism two industries   which have been almost put on hold in the past two  years once again companies were trying to service   their foreign debts which was driving down the  value of the currency in foreign exchange markets   the central bank initially raised interest  rates in an attempt to keep this currency   devaluation under control but president erdogan  had other ideas he has told the central bank to   lower interest rates and has fired a series  of central bank chairmen for failing to do so   he is convinced that a less valuable era in  foreign exchange markets is actually a good   thing because he will artificially make turkish  exports more competitive as they recover from   the impacts of global lockdowns this isn't  actually a totally illogical train of thought   many countries most prominently china have played  an active role in devaluing their own currencies   because they know it makes their goods cheaper in  foreign markets the problem is that turkey also   relies heavily on imports for things like fuel  food and fertilizer the currency devaluation   has meant that many small businesses and farms  are simply not able to afford import goods that   they need to keep their businesses going the  unfortunate irony is that wealthy institutions   have access to financial instruments like futures  to mitigate risk exposure to currency fluctuations   wealthy turks with savings have also moved their  cash into american dollars or euros further   accelerating the decline of the lira's price this  meant that once again it is the working class and   small businesses that are feeling most of the  pain of this latest crisis so if this strategy   is clearly not working why not just raise the  interest rates again well there is probably a bit   of political motivation to this remember turkey  may have a secularist constitution but its leader   is still a strong believer in islam and islamic  finance so interest is bad raising interest   rates would also look like admitting defeat at  this point since the government has pushed the   idea that the country can grow its way out of  this issue rather than resorting to austerity   like it did in 2018 the real shame amongst  all of this is that it's totally unnecessary   turkey has a very solid foundation it's got a good  workforce of young and highly skilled citizens   it's not over a line on one industry and during  periods of stability it has demonstrated a clear   ability to grow rapidly but all of the poor  decisions that led to where it is now are   likely going to look insignificant compared  to a new plan the government just unveiled   turkish banks are well aware of the hesitancy of  their customers to have savings in turkish lira   even with incredibly high interest rates on offer  most people just don't trust the stability of the   currency it's important to remember that while  inflation has improved in the past two decades   it's still hovering around eight percent for  comparison a lot of economists are freaking   out about the idea that the us could experience a  six percent inflation rate over the next two years   it's because of this that most turkish banks offer  us dollar accounts for people to save their money   this is how most of the wealthy people that  we mentioned earlier exchange their money   away from the lira the deposits in these accounts  do not attract the sky-high interest rates of the   lira-based accounts but for most wealthy turks  that's a sacrifice they are willing to make for   the relative stability of the dollar the problem  this causes is that over time people will just   start to use american dollars exclusively meaning  that turkey will lose its monetary autonomy   for some small countries this is fine for example  monaco is not part of the eu but it still uses the   euro the autonomy such a small country would  get from minting its own currency is just not   worth the cost involved in doing it and getting it  recognized for a country like turkey however this   would be very bad news it would not be able to set  its own interest rates and would therefore lose a   significant amount of control over economic  growth and employment a country with ambitions   of being in the global top 10 is going to need  its own currency to combat this dollarization   the government has announced plans to introduce  a new type of savings account which will protect   borrowers from headline inflation the account  would work like this any money deposited into   the account will attract the central bank's cash  rate at this point 14 and then at the end of a   fixed period the turkish treasury will pay out an  additional amount equal to the value lost due to   inflation if for example you deposit a thousand  lira for 12 months you would receive 140 lira in   interest over those 12 months assuming this is  only compounded annually for simplicity's sake   if the value of the lira halved in that time  then the treasury would award you an additional   1 000 lira so that the value of your holdings  relative to the american dollar remains the same   it's unusual but desperate times call for  desperate measures on the surface this looks to be   a pretty inspired idea the government guarantee  effectively amounts to a higher interest rate   without needing to call it a higher interest rate  in our example from earlier you would be able   to achieve the same thing by offering a 114 apr  on savings but if you just call it a government   guarantee instead then you don't need to look  at big scary numbers besides the marketing spin   this could also encourage many turks to trade in  their american dollars which generate little to no   interest for inflation guaranteed lira which offer  a 14 interest rate this trading should push up   the value of the lira in foreign exchange markets  making regular imports more affordable once again   initially it kind of looks like this has worked  the value of the turkish lira jumped over   50 following the announcement of these new  accounts but that's about where the good   news ends a few skeptical journalists pointed  out that this increase in the value of the   turkish lira coincided with a significant  drop in turkey's foreign currency reserves   what this might suggest is that the government  bought up its own currency in an attempt to make   it look like this policy decision had more of an  impact on public perception than it really did   of course this development is still unfolding so  it's hard to say for certain that this is what's   happened but it's also very difficult to see an  alternative explanation anyway the world's most   expensive publicity stunt is really not the big  issue here what is the problem is the debt burden   this could expose the country to let's suppose  that turkish citizens do take up this offer on   mass and then the lira continues to fall due to  monetary mismanagement the treasury could be on   the hook to pay hundreds of billions of dollars  this would force the government to do one of two   things the first option would be just to default  on this promise to top up bank accounts in line   with inflation this would obviously be extremely  politically unpopular so the government would   probably go with option two which is breaking  the rule of not directly borrowing money from   the turkish central bank there is no other way  that the government could get access to enough   cash to cover this promise in the event that  people do actually take up the offer and inflation   continues at its current rate the government  has exposed itself to a significant potential   liability here which could quickly turn the  current situation which is a serious but easily   treatable problem into something that could push  turkey towards a fate like argentina or venezuela   if i was making this video five years ago i would  be telling a very different story about turkey if   i was making videos five years ago i would have  told a very different story about venezuela   okay now it's time to put turkey on the economics  explained national leader board starting with   size turkey is one of the largest economies in the  world which is part of the reason why it's getting   so much attention in the news a gdp of 720 billion  dollars in 2020 means it gets a 7 out of 10.   gdp per capita is about what you'd expect for a  developing country facing the issues that we've   explored in this video it's down from a peak  of twelve thousand six hundred dollars in 2013   to eight and a half thousand dollars  today it gets a five out of ten   stability and confidence well what is there to  say even over the past two decades of relatively   controlled inflation and strong growth the  country is not what you would call a safe haven   political tensions and a perceived inability to  manage a crisis means that most institutions want   as little to do with turkey as they can possibly  manage it gets a 2 out of 10. growth is also poor   i might sound like a broken record at this  point but if i was making this video 5 years ago   i would have given the country a 10 out of 10  as the economy had more than quadrupled in size   since the year 2000. unfortunately it's 2021  and we measure growth over the past 10 years   turkey is down from where it was in 2011 so it  gets a 0 out of 10. finally industry this is the   real tragedy here because turkey is fundamentally  a solid economy there is no reason that turkey   couldn't be a wildly successful trading power in  the region it has a healthy and diverse industrial   sector but unfortunately these industries have  been the victim of poor macro management so for   now it gets a five out of ten altogether this  gives turkey an average score of 3.8 out of 10.   yeah well we all knew this one wasn't going to  be good but you know what is good learning a   new skill in the new year with skillshare thanks  again to skillshare for making this video possible   if you're feeling stressed out after another  trying year why don't you try immersing yourself   in the laid-back aussie way of life by taking  my course on mastering the australian accent   if you are after a skill that you're more  likely to use outside of impressing your mates   at a barbecue then skillshare has you covered  with everything from coding to video editing   our modern economy rewards people that bring  a unique combination of skills to the table   and you never know when coding video editing  or cinematography might combine with your   core expertise to give you a leg up over your  competitor if you would have told me five years   ago that i would be combining my economics  degree with media production i probably   would have laughed at you but here i am you'll  never regret learning how to do something new   so whether it gets you a new job or just gets you  a few laughs be sure to check out what is on offer   at skillshare the best part is if you sign up in  the link on screen or in the video description   below you can get 30 days of skillshare premium  completely free thanks for watching mate bye

Channel: Economics Explained

Views: 3,731,036

Keywords: economics, economics explained, turkey, economy of turkey, turkey hyperinflation, hyperinflation, turkey interest rates, turkey economy 2021, 2022, turkey economy news, turkey gdp, turkey tourism, turkey president, is turkeys economy failing, turkey debt, currency crisis, turkey central bank, central bank fired, turkey inflation, turkey economy, world reserve currency, turkish economy, turkey inflation rate, turkey currency, turkish lira crisis, economy explained, turkey news

Id: O4stI2TVPIc

Length: 22min 53sec (1373 seconds)

Published: Sat Jan 15 2022