Inflation and the stock market surge: Unravelling Turkey's economic dilemma

Understanding the government's measures, corporate pricing, and citizens' pivot to alternative revenue streams.

The number of investors in the stock market has surged due to inflation and income loss. Prof. Dr. Karatepe suggests that the swift pivot toward the stock market is driven primarily by a need to counteract difficult living conditions, with poverty being a significant catalyst.

The government has rolled out a new economic strategy to combat inflation. The approach emphasizes curbing domestic demand and stabilizing the economy. Elevated credit card interest rates, selective credit tightening, and the diminishing purchasing power of wages have seemingly propelled individuals to seek alternative revenue streams.

With an additional one million investors flocking to the stock market within a month and a string of company offerings, is the stock market now viewed as a beacon of hope? Does the government's assessment of the root causes of surging inflation hold water? What does an IPO entail, and why are companies choosing to go public?

We directed these inquiries to Prof. Dr. Yalcin Karatepe, an esteemed professor from Ankara University's Faculty of Political Sciences, Department of Business Administration. Karatepe reiterated his stance on the rapid shift to the stock market, highlighting the primary influence of poverty.

Assessing the government's stringent monetary measures against inflation—including interest rate hikes on credit cards and selective credit curtailment—it's crucial to understand their broader strategy. The government perceives robust domestic demand as the primary inflation driver, underpinned by citizens' spending habits. The method involves restricting disposable income.

Two primary measures are in place. First, the government has suppressed wage and pension growth. Even though there was a notable minimum wage increase last July, its impact eroded due to subsequent inflation. Public sector employees received a modest 17.5% raise, curtailing some benefits. Minister Mehmet Simsek revealed that future wage increments will align with projected inflation rates at 33% for 2024, with reductions anticipated afterward. Through these restrictions, the government aims to curtail consumer spending.

Additionally, a spotlight has been cast on the role of credit. The primary focus here is on credit cards due to their ease of access. Their widespread use is driven by citizens' inability to cover expenses through regular income, necessitating reliance on credit.

However, it's disputable whether citizens hoard goods in anticipation of future shortages, and if so, to what extent. They must eventually service these debts, challenging the government's understanding of inflation drivers. For instance, despite tea prices doubling over three months and diesel prices skyrocketing, attributing these hikes solely to increased consumption seems myopic. Factors such as taxes, currency value fluctuations, and global oil prices play significant roles. Hence, the government's diagnosis seems flawed.

What, then, is the actual cause of inflation? While supply chain disruptions during the pandemic and subsequent cost increases played a role, a predominant factor seems to be elevated corporate pricing strategies, resulting in significant profit margins. This trend is observed globally, as indicated in reports by the International Monetary Fund (IMF). The Turkish Statistical Institute's data also corroborates this trend, highlighting record earnings 2022. Thus, a misdiagnosed problem is likely to yield ineffective solutions. Understanding why citizens rely so heavily on credit cards becomes imperative.

The surge in credit card debt and the allure of IPOs

Returning to the topic of credit cards, as of September 1, data from the BRSA (Banking Regulation and Supervision Agency, in Turkish: Bankacılık Düzenleme ve Denetleme Kurumu) indicates that the total individual credit card debt stands at 922 billion liras. Now, let's analyze this in the context of total loans. The overall credit-driven debt is 10.4 trillion liras, with credit card debt accounting for 8.8 percent. Given these figures, it becomes evident that broader loans must be rigorously re-evaluated if there's an intent to curtail the credit channel. An 8 or 9 percent focus is not representative of the whole picture. It's misleading to presume other loans are solely invested. Take SME loans, for instance; I'm aware of cases where SMEs (Small and Medium-sized Enterprises) secure loans at minimal interest rates and then use those funds to acquire real estate or purchase cars, which they sell at elevated prices.

Furthermore, the 922 billion lira credit card debt is broken down by the BRSA as follows: there's debt from installment purchases, such as appliances, textiles, and vacations, amounting to 419 billion liras. But the critical question is about non-installment debt – what's its volume? Two months ago, I found that while non-installment debts were skyrocketing, the rise in installment debts was only a quarter of that.

This surge in non-installment debt is telling. It indicates that consumers primarily use credit for necessities like groceries, household essentials, and fuel. Essentially, the bulk of credit card debt is attributable to essential goods and services necessary for daily life. This isn't discretionary spending. It results from people's income failing to cover their actual expenses. Consider a scenario where an individual earning a minimum wage of 11,400 liras expends half on rent; the remainder is inadequate for basic costs. The solution? Rely on credit. With stringent limits on other credit avenues, credit cards become the sole accessible channel. The curbing of this option suggests impending challenges for individuals in covering necessities.

Interestingly, IPO (Initial Public Offering) has become one of the most searched terms today. The stock market has seen an unprecedented influx of investors, signaling a potential refuge in turbulent times. The Central Registry Agency (CRA) notes that investor numbers have surged to 7.3 million, up from 6.3 million just a month prior. Surprisingly, over a quarter of these are small-scale investors, with modest portfolios ranging from 1,000 to 7,500 liras.

This trend, a reaction to insufficient incomes, reflects individuals' urgency to seek profitable avenues. A few years ago, cryptocurrencies, notably bitcoin, dominated search trends. Now, IPOs have taken the lead. Geographical data shows regions with lower incomes are the primary seekers of crypto and IPOs, highlighting a desperate quest for financial solutions.

So, what's driving this trend? It's a stark testament to the prevailing financial hardships. People are not merely drawn to the stock market out of interest in established industries. Many are lured by companies going public, hoping for lucrative returns. This isn't about informed investment; it's a desperate attempt to escape financial strain.

However, there's an alarming pattern emerging: stocks that open at, say, 10 liras witness an exponential rise, sometimes reaching 150 liras within a month, which is not normal. A sophisticated system involving the company, intermediaries, and the state determines the opening price based on various factors. Yet these meticulously calculated prices experience abnormal spikes in a short span. What knowledge or strategy leads to such outcomes?

Additionally, there's been a surge in companies going public, and a closer look reveals that a significant portion of these IPOs consists of shareholder sales. In these cases, the proceeds don't benefit the company but go straight into the owner's pocket. The demand, however, isn't discerning. Many investors don't discriminate between companies, making hasty decisions based on prevailing IPO trends.

Social media has become a hotbed for informal and often unauthorized investment advice. Accounts promising tenfold returns contribute to the frenzy. Yet, it's worth noting that these advisors often seek a way out of their underperforming portfolios.

Lastly, there's a looming concern that the stock market might mirror the burst bubble observed in the crypto world. If the economy cools down, both investors and companies could suffer. When the tide turns, stocks that previously saw no sellers will soon find no buyers. The liquidity illusion might shatter, yet the government's medium-term program suggests that facilitating IPOs remains on the agenda.

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