The great Turkish emigration

Fethiye Fish Market - almost empty at lunch time

If you went to a supermarket in Turkey in 2014, you might have paid 10 Turkish Lira (TRY) for a decent bottle of white wine. That was the equivalent of €3.50, for a European tourist.

Just over 10 years later, that same bottle of wine would cost you 600 TRY, or about €13.50. For a European tourist, that is inflation of about 4-times over that period. Which is bad enough, but pity the poor local Turkish wine-lover, who now has to pay 60 times as much!

Some of that inflation is down to the increased alcohol taxes, that Erdogan’s Muslim advisors have inflicted, as they gradually reject Ataturk’s century-old, modernising, and westernising reforms.

[As a quick aside, I was reminded only recently by Lynn, that the call to prayer, issuing regularly from the increasing number of minarets, is actually in Arabic, not Turkish. And most Turks do not understand Arabic. To this extent, Türkiye is like 16th century, pre-Reformation England, where poor, English-folk had to listen to church services delivered in Latin.]

But most of the price-hikes are down to failures in basic economics, and to Erdogan’s unorthodox approach to fiscal management. Very simplistically, inflation generally occurs when there is too-much money chasing too-few goods.

For example, Quantitative Easing (QE) – used as a response to the financial crisis, and to the bizarre Covid-19 lockdowns - created lots of new money. As this money was chasing the same amount of goods, prices for those goods increased. During Covid-19 lockdowns, and when Russia invaded Ukraine, logistics supply-chains were interrupted, meaning that fewer goods were being chased by the same amount of money. So, prices for those goods increased.

The most-important tool that economists in Central Banks use to control rising prices, is control of interest rates.

When they increase interest-rates: a) this encourages savers to save, thus taking money temporarily out of the market; and b) it increases the cost of loans to individuals and companies, thus reducing the demand for banks to ‘create’ new money for lending. Both these responses have the effect of reducing money supply, thus reducing price inflation.

Conversely, running low interest-rates increases spending - why save money… - and also increases the appetite for loans. This creates more money, and so can be inflationary, if the amount of goods/services created does not also increase proportionally. 

Now, during all the inflationary episodes of the last 10 years or so, most western Central Banks have raised interest-rates to control inflation. And if Ataturk had still been alive, he would have made sure the same was done in Türkiye.

But Erdogan has been increasingly under the influence of the Muslim mullahs. And these clergy view usury – the loaning of money for gain – as a sin. And so does Erdogan. The idea of a bank lending money to an individual or company, to earn interest is anathema to them. Increasing interest rates is even worse!

So, Erdogan kept interest rates low, to appease the men-of-the-cloth. As we have explained, this simply encouraged spending and borrowing, and discouraged saving. So, money-supply increased in Türkiye, and so did the price of goods.

Critically, a lot of goods are imported into Türkiye. Far more than are exported. This is a major problem for Erdogan’s finance ministers, because to import goods from Europe (for example), Türkiye needs to pay for those goods in Euros. And Türkiye must buy those Euros with TRY.

Unfortunately, the TRY is worth less and less on the money markets, and one TRY buys fewer and fewer Euros. Why? First, as interest rates were being kept low, no foreigner wanted to buy TRY as an investment. Second, inflation meant that the TRY was losing value, also dissuading buyers. As a result, Erdogan’s finance ministers/Central Bank had to create even more TRY, simply to buy the Euros required to keep the import-fuelled economy functioning. They did this partly by selling their bank reserves of gold and USD.

So how do ordinary people behave in such circumstances? If you are a poor, ordinary Turkish worker, earning a wage in TRY, life now is tough. There is no point saving money, as you know it will be worth less tomorrow. So, you may as well spend it today, no matter what the inflated price of goods is. This causes more inflation.

And if you are a businessman, knowing that the cost of your inputs will increase tomorrow, the temptation is to increase the price of your goods today to cover the future costs. That too causes inflation.

This is a very nasty cycle from which to escape.

And then there’s is ‘greed-inflation’, where prices are put up simply because the buyer might be able to pay, no matter how silly the price. The classic examples are in the tourist industry, where European holiday-makers used to spend Euros with gay abandon, whilst onboard gulets, or charter yachts or in sea-side hotels.

Inflated taxi fares in hard currencies

I could have talked about restaurant prices, but Alix spotted a good example for airport taxi-transfers. A tourist wanting a transfer from Dalaman airport to Gocek is faced with a fixed-tariff: $35/£25/€30 or 900 TL. Now €30 at 43 TRY/€ is 1,290 TL, which is a whopping 43% mark-up on the listed TRY price. (The tourist could buy a heap of TLY at home, and bring them. But it’s a hassle, they would probably get a poor exchange rate, and there would be fees on top.) So, the tourist probably pays the inflated rate in hard currency.

Someone had to be blamed of course. Erdogan sacked at least one finance minister, plus the deputy chairman of the Central Bank, who had criticised the low interest-rate policy.

In the meantime, European yachties have left Türkiye in droves, and they continue to leave now in dribs and drabs, sailing westwards to Greece. They are sad that their relatively simple and affordable lifestyle afloat here, has been priced out of their grasp. They can no longer stomach tens of thousands of €s for an annual marina contract, nor hundreds of €s for a berth for one night. They want to eat out, but not at €40+ per head.

This may seem like ‘a First-World-problem’ for the tourists. You may utter an ironic "Shame!". But tourism is the highest revenue-earning sector in Türkiye, accounting for nearly 12% of GDP.

And, so, the place is quiet. The cafes in town are quiet. The day-tripper boats are half-empty - many don’t leave the quay. The water-side restaurants with their rickety piers are half-filled at best. Yachts are anchoring off, and eating aboard instead, much to the frustration of the restaurant owners trying to cajole them in.

Relatively quiet resturant pontoons

The most numerous tourists – Russians – are also falling out of love with Türkiye, and numbers are expected to drop by 25% this year. (They may go to Egypt instead). The charter companies are already offering 30% discount for yachts offered in the peak season of July and August. Our yacht agent/broker has given-up his office lease in Gocek, as there is no foot-fall, with few people in the market now for a second-hand yacht. He says the charter companies keep contacting him, to try and get rid of boats they no longer need. This is not just the normal annual turnover of one or two of the older yachts, but mini-fleets of eight or so yachts at a time!

However, it feels like a correction is happening, Change is afoot. The latest financial team has decided to stop the rot, and to break the cycle. They have increased interest rates to around 50%! Erdogan is trying to bite his tongue. There are signs that inflation is flat-lining or even falling? Time will tell if hold their nerve and the policy succeeds.

Now, I do quite like a bit of peace and quiet, and I hate the scrum of overcrowded quays and anchorages. But, I do hope that the industry does get a reprieve, and that Erdogan lets the finance team see their job through to the bitter end.