The Arab Spring will end with no winners, only losers

Egypt, Syria and Turkey: The Lepers with the Fewest Fingers

By David P. Goldman

With the financial news focused on the unraveling of Europe’s state finances, the mounting economic catastrophe in the Muslim world has barely merited a mention. Egypt and Syria are about to go over a cliff, while Turkey, supposedly the poster boy for Islamic success, faces a nasty economic reversal — not a catastrophe of Egyptian proportions, but sufficient to destroy Tayyip Erdogan’s reputation as an economic wizard and make his fractious country hard to govern. The so-called Arab Spring will end with no winners, only losers.

Egypt: Two Months Import Coverage, and Falling

Egypt’s foreign exchange reserves stood at $36 billion before the February uprising. The central bank claims that it still has $22 billion on hand, but an analysis by the Royal Bank of Scotland reported by the Financial Times puts the true number at just $13 billion, or two months’ import coverage for a country that imports half its caloric consumption. The central bank has lost $23 billion of the $36 billion in the past ten months, the RBS analysis concludes. Adds the FT:

Even that’s not the end of the story. First half 2011 balance of payments figures showed a deficit of $10.3bn in a period when the central bank actually lost $17.6 bn in liquid and other foreign currency assets, says Agha.

So hard currency is going into capital flight and into the proverbial mattress. Egyptians are even hoarding Egyptian currency, with the level of currency in circulation growing dramatically this year at an annual rate of 25 per cent, compared with 13 per cent previously.

By early 2012, expect to find the members of the Supreme Command of the Armed Forces moving into just-purchased mansions in South Kensington or Cannes, and bare cupboards in state warehouses. The military’s only response to the crisis was to fire all the independent directors of Egypt’s central bank, as I reported last month. That implies that they want a free hand to embezzle. By the end of next year, I predict, Egypt will become Somalia-on-the-Nile.

Assad Goes for Broke, Literally

Syria, meanwhile, plans to raise government spending by 60 percent, mainly in the form of salary hikes for state workers, while tax revenues plunged by 40 percent, Bloomberg News reported today. By my back-of-the-envelope calculation, that would put Syria’s government deficit about a third of GDP. Syrians were hungry before the uprising against Assad, which began with a protest over food prices. The Assad regime is betting the Syrian treasury on its survival, and the likeliest outcome is a collapse of the currency and chaos. It is hard to measure the economic misery of a country in civil war, particularly since the government has restricted food, energy and water provisions to areas of opposition strength. If the civil war continues, of course, the body count will take everyone’s mind off the economy.

Erdogan to Turks: “Let Them Eat Baklava”

The Turkish government seems to be losing its grip on reality.

Turkey, hailed as an Islamic economic miracle by credulous observers, is sitting on the the world’s biggest bubble. It imports twice as much as it exports, and the difference (the trade deficit) is greater than 10% of GDP, about the same level as bankrupt Greece. To aid his re-election efforts in the leadup to last June’s national elections, President Recep Tayyip Erdogan encouraged Turkish banks to increase loans to consumers at a 40% annual rate. Turks bought consumer goods on credit at high interest and Turkey borrowed heavily in the short-term money markets to finance the binge, as I reported some months ago in the Asia Times. Turkey’s central bank assured the world that the deficit would shrink; instead, it’s gotten worse, shredding the central bank’s credibility.

A vicious cycle is underway: Turkey has to borrow in the short-term markets to finance its deficit, which makes foreign depositors reluctant to keep their money parked in the weakening Turkish currency, so Turkey has to pay higher rates. Short-term deposits in Turkish lira now pay over 10%, against a quarter of a percent for dollars. High domestic rates squeeze over-leveraged Turkish debtors.

Erdogan’s response is to insist that “real” (that is, inflation-adjusted) interest rates should be at zero, citing Koranic injunctions against collecting interest. Bloomberg News reports that anyone who disagrees with Erdogan’s “vision” of zero interest rates winds up on an “enemies list”:

As Prime Minister Recep Tayyip Erdogan pursues his vision of an economy with real interest rates at zero, critics of Turkey’s monetary policies are increasingly being portrayed as enemies.

Trade Minister Zafer Caglayan says analysts who find fault with the initiative belong to an “interest-rate lobby” that wants to force Turkey to raise rates to help create higher returns. Erdogan says interest rates should be close to zero after inflation. He said during a speech in May to the Islamic business association Tuskon in Istanbul that Turks should earn their money “through work, not interest.”

The skeptics are seeking to “suck Turkey’s blood,” stop its growth and keep the country indebted to foreigners, Caglayan was quoted by state-run Anatolia news agency as saying in July. In a written response to Bloomberg questions on Nov. 3, Caglayan said the government’s view hasn’t changed. He declined further comment.

Erdogan probably is not as stupid as he appears: with the bubble about to burst, he is spinning a story about a conspiracy against the Turkish economy (just as he spun a story about a supposed military coup plot against his Islamist government). But the outcome will be no less messy for the spin.