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Analysis

Turkey’s Financial Setback

What happened?

Istanbul: State data revealed that the annual inflation rate in Turkey has surged to a 20-year high of 48.7% despite months of assurances by President Recep Tayyip Erdogan that the soaring figures were just temporary and that his government could ease the pain on Turks weighed down by rising living costs. Turkish citizens are the most affected since prices of consumer goods rose by 11.1% from December to January, according to the Turkish Statistical Institute. Analysts predicted that the prices of consumer goods increased between 9% and 10%.

Moreover, the Turkish lira (Turkey’s currency), lost 44% of its value in 2021 in a rout driven by the president’s refusal to raise interest rates as the inflation consistently climbed. Evidently, the currency’s turbulence has hit Turks hard, as the value of their salaries dropped and costs of goods and energy dramatically increased. The president has prioritized credit and exports, while constantly arguing against economic orthodoxy that raising interest rates worsens inflation rather than taming it. 

How did this happen?

Nations around the world have been grappling with price spikes caused by supply chain snarls and shortages of raw materials due to COVID-19. However, inflation in Turkey has been exacerbated by a dramatic fall in the value of the Turkish lira, which lost more than 40 percent of its value against the United States dollar last year. The lira’s crash in the final quarter of 2021 was triggered by a series of central bank interest rate cuts championed by Turkish President Recep Tayyip Erdogan, who still insists that lower interest rates combat rising inflation – a view that runs opposite to mainstream economic theory, which holds that lower borrowing costs typically increases price pressures thus leading to lower purchasing power in all.

“We are in sorrow to see our yearly inflation hitting 36 percent,” said Erdogan. “Nevertheless, as a government that managed to decrease inflation to 6 percent, we will repeat our success to protect Turkish citizens from financial troubles.”

Attempt to combat inflation by increasing minimum wage

To help cushion the blow of rising prices, the Turkish government raised the minimum wage by 50 percent and boosted the government match on private contributions to public pensions. 

However, the minimum wage hike was also accompanied by price increases in regulated sectors of the economy. Electricity tariffs have shot up by 125 percent for higher-demand customers and 50 percent for lower-demand residential customers. Natural gas prices have gone up 50 percent for industrial use and 25 percent for residential use. The cost of public transportation in Istanbul has also seen a drastic increase by 36 percent.

Therefore, the government has attempted to assist the poor in this financial crisis while the burden has partially fallen on middle-class consumers.

Politics and Inflation

Turkey’s opposition parties have seized upon the variation between official TurkStat inflation numbers and what many members of the public and experts think. Ali Babacan, a former Erdogan ally who served under him as finance minister and now heads the Democracy and Progress Party, called TurkStat the “Institute for Adjusting Numbers” in a tweet shortly after the December inflation figures were announced.

Last month, during a live television broadcast, the head of the largest opposition party, Kemal Kılıçdaroğlu, attempted to visit TurkStat’s head offices in the capital Ankara to inquire about how inflation is being calculated, only to be turned away. Thus, it is evident that the Turkish government  is trying to hide their numbers while reassuring the citizens through futile attempts.

A new economic model?

Treasury and Finance Minister Nureddin Nebati outlined Turkey’s new economic path to investors in London, pledging to keep the exchange rate stable, bring inflation down to single digits and keep dollarization at bay.

Speaking to investors and bankers in meetings, Nebati also said that the government would soon announce a new scheme to get households to convert holdings of gold into Turkish lira.

President Recep Tayyip Erdoğan has been endorsing a model based on lower borrowing costs, which he says will boost production, employment and exports, and also eventually help Turkey solve its chronic current account deficit problem and contribute to stabilizing the Turkish lira.

Gold Savings Scheme

Two investors who attended meetings said the minister had told them about the plans to ensure part of the $250 billion-$350 billion worth of gold held by Turkish households would find its way into the domestic savings system.

“The important thing for us is the stabilization in the exchange rates. With this package, we will have put the gold under-the-mattress into the system, which is estimated to be around 5,000 tons of gold equivalent to 250-350 billion US dollars (the “under-the-mattress” term refers to a long-held tradition in Turkey of turning to gold to safeguard wealth and storing it at home).

A certain amount of this will support the Central Bank of the Republic of Turkey (CBRT) and meet the need for foreign exchange, he noted. “But most importantly, it will shore up the Turkish lira, which forms the basis of our model.” The government will make announcements soon on how to convince people to let go of their gold holdings. An investor stated that if the gold finds its way back into the banking system, it will certainly help to broaden the monetary base in terms of the Turkish lira.

Borrowing

Investors are also eyeing Ankara’s foreign borrowing plans. The Treasury did not immediately comment on the possible sale. According to Refinitiv data, Turkey is due to pay off a $2 billion eurobond on February 21th and a $1.1 billion domestic bond on February 25th.

Nebati also said at investor meetings that the government had held very productive talks with Abu Dhabi, Saudi Arabia and Israel in recent days, and swap lines were being agreed upon. He declined to give further details.

In conclusion, more details on the new economic model are yet to arrive. Most of the government’s efforts have gone in vain – the Turkish citizens have been hit hard due to this crisis with a hike in the prices of basic necessities such as gas, food and transportation.

Sources

https://www.dailysabah.com/business/economy/turkey-pitches-new-economic-model-signals-new-steps-to-shore-up-lira

https://www.aljazeera.com/economy/2022/1/7/just-how-bad-is-inflation-in-turkey-it-depends-on-who-you-ask#:~:text=The%20lira’s%20crash%20in%20the,ho

https://www.dailysabah.com/business/economy/turkeys-inflation-highest-since-2002-hitting-487

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Analysis

Bottleneck Recession in Germany: when will the situation improve?

Introduction

It is no surprise that the COVID-19 pandemic has damaged many of the world’s biggest economies. Last year in Germany, however, economists started predicting something called a “bottleneck recession”. Many of the materials that German firms need for production of goods are in short supply, hence harming the supply chain of the economy. But when will the German economy bounce back? And what will be the consequences of such a recession?

What are supply bottlenecks?

One of the most important issues to consider here are supply bottlenecks. A simple analogy for a ‘bottleneck’ would be a machine that is not working efficiently, and hence a long waiting period appears until the final result is delivered. 

In general, this occurs when price increases (inflation) result in an increase in the price of wages as well as raw materials. This causes a decrease in aggregate supply (amount of total production) of an economy. And because the demand for goods does not change (meaning people still want the same amount of goods as before), firms have to increase prices of the goods. The effect is that the increased cost of production is passed onto the consumers by firms.

Recent developments

Global supply chain bottlenecks have been one of the biggest problems in 2021 for many countries. One of the most affected economies was Germany because exports of cars, machine tools and other goods make up approximately half of its economic output. In the US, economic output depends on only 12% of  these types of exports. This sort of dependence on manufacturing and trade makes countries like Germany more susceptible to issues in the supply chain. 

Put simply, if factories do not have the necessary raw materials for production of goods, their economic output and amount of exports will decrease and hence harm the economy. 

It should be mentioned that economic output may have increased in November of 2021, but it also decreased by that same amount in December 2021, hence canceling out any growth seen in the German economy. And with the current Omicron outbreak, it is unlikely the situation will improve anytime soon. Production cuts, staff shortages and restrictions are all results of rising infection rates. Combine this with increasing costs of energy and the country’s going into the aforementioned bottleneck recession. 
However, the future isn’t all uncertain for Germany’s economy. Many think spring will “mark a resumption in the pandemic rebound”. It is expected that “energy prices [will be] digested and supply-chain problems [may be] eased by then” which would lead to growth in the second and third quarters of 2022.

Impacts

Germany already faced consequences of the supply chain bottleneck in 2021 with its car sales rapidly shrinking and “Volkswagen AG deliveries [dropping] to the lowest in a decade, despite robust orders” 

4.1% was the earlier estimate of growth in Germany in 2022, which has now been lessened to 3.6%, mainly because tensions between Russia and Ukraine may result in augmented energy prices, even more so than beforehand. 

All of this was and will be the result of the bottleneck recession in Germany. However, such bottleneck issues in many economies can lead to “corrective behavioral changes over time”. Instead of focusing on efficiency, many countries that did go through supply chain bottlenecks this past year, will hopefully focus on making their economies more resilient as well, to avoid such setbacks in the future.

Conclusion

Today, Germany’s economy is still struggling because of supply shortages, with economic growth declining and the inflation rate increasing in 2021. But there is much hope for the next few years. Germany’s economy is expected to pick back up in the spring of 2022 as infection rates will hopefully decrease and make way for the gains that will likely take place in 2023.

Sources

Deutsche Welle. “Germany’s Bundesbank Lowers 2022 Economic Growth Forecast | DW | 17.12.2021.” DW.COM, 17 Dec. 2021, http://www.dw.com/en/germanys-bundesbank-lowers-2022-economic-growth-forecast/a-60156000.

Ewing, Jack. “Fears of a ‘Bottleneck Recession’: How Shortages Are Hurting Germany.” The New York Times, 5 Oct. 2021, http://www.nytimes.com/2021/10/05/world/fears-of-a-bottleneck-recession-how-shortages-are-hurting-germany.html.

Kenton, Will. “Cost-Push Inflation.” Investopedia, 30 Sept. 2020, http://www.investopedia.com/terms/c/costpushinflation.asp#:~:text=Cost%2Dpush%20inflation%20occurs%20when. Accessed 9 Feb. 2022.

Randow, Jana. “Bloomberg – Are You a Robot?” Www.bloomberg.com, 14 Jan. 2022, http://www.bloomberg.com/news/articles/2022-01-14/german-economy-heads-for-recession-after-shrinking-last-quarter. Accessed 9 Feb. 2022.

Rees, Daniel, and Phurichai Rungcharoenkitkul. BIS Bulletin No 48 Bottlenecks: Causes and Macroeconomic Implications. 2021.

Weber, Alexander. “Omicron, Supply Shortages Risk Pushing Germany into Recession.” Www.aljazeera.com, 28 Jan. 2022, http://www.aljazeera.com/economy/2022/1/28/omicron-supply-shortages-risk-pushing-germany-into-recession. Accessed 9 Feb. 2022.

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Weekly Summaries

3rd of January – 9th of January

Situation in Sudan

Last week, Sudan’s military and security forces re-gained complete control over the country. The military leader promised to form “an independent government,” after the civilian prime minister Abdalla Hamdok left the country last Sunday, leaving the country in chaos. Protests were met with security forces, especially in the capital, Khartoum. According to the New York Times, at least 57 people died.

Other News

  • There was an assasination attempt on Haiti’s President over the weekend, which he survived
  • Turkey’s year-on-year inflation reached 36% in December, a 19-year high
  • Apple’s value as a company has tripled since 2018 when it recently became the first company to become a $3 trillion company
Categories
Weekly Summaries

19th of April – 25th of April

President Déby of Chad killed

President Idriss Déby was considered crucial “to battling Islamist extremism in the central Sahel region,” according to the New York Times. Thus, he was backed by both France and the United States. This past week, however “he was killed in clashes between insurgents and government soldiers” (the New York Times). He had just secured his sixth term in office.

Other News

  • Aleksei Navalny is on his third week of hunger strike to protest against his lack of access to medical treatment and has now been moved to a hospital
  • Last weekend, a passenger train north of Cairo derailed, killing at least 11 people
  • The U.S. and China made an agreement to work together to fight climate change
  • Argentina’s inflation rate is now above 40 percent