As ordinary citizens seek to preserve their wealth, President Recep Erdogan’s Justice and Development Party is finding new ways to take advantage of the gold rush.
The Turkish economy is “a train wreck in slow motion,” in the words of one former central banker.
The Turkish lira, which lost 20 percent of its value against the U.S. dollar last year, wasone of the worst-performing currencies in the world in 2020. Foreign currency reserves nosedived deep into the red if one accounts for Ankara’s liabilities to local banks. And economy czar Berat Albayrak—son-in-law of President Recep Tayyip Erdogan—hasn’t been seen in public since he resigned via Instagram on Nov. 8.
But an even better gauge of this slow-rolling economic crisis is the Turks’ frantic rush for gold. Since last year, Turkish firms and retail investors almost tripled their gold holdings to $36 billion. This is in addition to the 3,000 to 5,000 metric tons of the metal they keep at home, worth between $186 billion to $310 billion at current market prices. The rush to import gold to meet skyrocketing demand has wreaked havoc on Turkey’s trade deficit, with the January-November shortfall widening to $45 billion, nearly doubling compared to last year.
Seasoned by prior episodes of hyperinflation, currency devaluation, and bank failures, which together destroyed fortunes overnight, Turkish citizens have developed an uncanny sense for risks ahead. In fact, the Turkish public’s turn to gold may offer a better indicator of stress in the financial system than the usual macroeconomic indicators, which can predict the system’s trajectory, but not exact timing.
For Turks, gold has long been the most popular form of savings as well as a safe haven from systemic crises. A recent survey by the Dutch bank ING’s Turkish subsidiary shows that for one in four Turkish citizens, keeping gold and foreign currency (FX) at home is the top choice for savings. Over the summer, the demand for safes increased fourfold to four thousand a month. On top of the one in four Turks who keep gold and FX at home, an additional 18 percent save through gold accounts at banks.
Turks’ retention of more gold at home than at the bank—where they can receive interest—is telling. There is a growing awareness that account holders’ $258 billion of gold and foreign currency deposits are no longer safe. This is due to the Turkish Central Bank’s$133 billion defense of the lira, which it is conducting in part through a double-swaptrick: The central bank takes FX deposits from private banks on the first swap, then hands them over to state banks (in exchange for lira) in the second swap. The state banks then sell the FX deposits (in dollars) to slow the lira meltdown.
Turkish citizens are beginning to fear that if there is a run on banks, they could see their FX deposits—their only hedge other than gold against lira devaluation—gone. Smart Turks are keeping their savings at home, whether in gold or FX.
But as ordinary citizens seek to preserve their wealth, Erdogan’s Justice and Development Party (AKP) is finding new ways to take advantage of the gold rush.
In October, AKP lawmakers—despite environmental concerns—submitted a draft bill torenew gold mining licenses in Turkey. Lawmakers have amended mining legislation over twenty times within the past two decades to skirt environmental regulations. Moreover, given the AKP’s history of off-balance-sheet arrangements for friends, it would be unsurprising to see kickbacks for new gold mining licenses.
Read more: https://nationalinterest.org/blog/buzz/turkey’s-frantic-gold-rush-points-financial-crisis-ahead-176118