Turkey has a team of highly effective policy makers, who crisscrossed Washington this past week and told anyone who’d listen that the central bank’s recent reserve losses, which are big, are due to the war with Iran and not about Turkey. That’s not true. They’re about an unhealthy pursuit of growth above all else, which – again and again – pushes Turkey’s current account deficit to unsustainable levels. Easiest way to see this is to look at the current account deficit in the first two months of this year, i.e. before the war. In these two months, the deficit is wider than any previous year expect for 2023, when Erdogan oversaw a big credit expansion to win that year’s presidential election. That episode ended in huge Lira devaluation right after he won that election. Things are similarly unsustainable now. The current account deficit is just too wide.
This chart shows the combined total of the January and February current account deficits for every year from 2000 to 2026. The reason I’m looking at these two months is because they happen to precede the war with Iran in 2026, so – whatever is going on with the current account – it’s got nothing to do with the spike in oil prices. The chart shows that the current account deficit in 2026 is the widest ever with 2023 being the only exception. Erdogan engineered a huge credit expansion in 2023 to win that year’s election and the Lira devalued immediately after he’d won it. This shows just how unsustainable things are now and this has nothing to do with the war in Iran.
I’m firmly in the camp that the war is over and that we’re in a negotiation phase. I’ve consistently argued that oil prices wouldn’t go to $150 or even $200 and that’s been largely borne out, but this isn’t the same thing as oil prices returning to pre-war levels any time soon. It’ll take a long time for the global oil market to normalize, especially where refined product is concerned, and that leaves Turkey in a tough spot. Better to just float the currency and accept somewhat higher exchange rate volatility as the price to pay for the constant attempts to lift growth above Turkey’s speed limit.