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  • Writer's pictureMECS

Turkish Economy on the Brink of Collapse?

President Erdogan, The Kremlin Moscow, March 10, 2017, 19:40

For over a decade, the Turkish economy has been supplied with easy credit. Here, economic growth became dependant upon the injection of foreign capital as a means to fund the country’s investments and domestic consumption. However, economic growth in Turkey was pulled to an immense halt as a result of the country’s standoff with the US following the imprisonment of American pastor Andrew Brunson in 2016 during the post-coup crackdown. The Trump administration has since placed an array of sanctions and trade tariffs on Turkey in a bid to both secure Brunson’s release and highlight US grievances with Turkey-Iran relations. Certainly, the escalation of Turkish-US tensions has undermined confidence in the Lira with annual inflation rising in August to almost 18 percent. Inan Demir, an economist at Nomura Securities provides that Turkey may curb the current financial crisis by acting accordingly:

“They need to hike rates, tighten fiscal policy, and ease tensions with the United States, removing the threat of further sanctions by releasing pastor Brunson”.

However, Erdogan seems unfazed by the lira’s falling this year to 42 percent against the dollar. Here, he has suggested that rather than being dependent upon the dollar for trade, Turkey should trade with local and regional currencies. However, it is unlikely that such a policy will be effective, particularly considering that Turkey is a net importer of oil, which is traded in dollars. Financial and stock markets have reacted badly to the souring of Turkey-US relations. Following Trump's announcement of doubling trade tariffs on steel and aluminium in August, shares in European banks with considerable investments in Turkey, such as BBVA, Unicredit, and BNP Paribas, have fallen.

An Economic Conspiracy?

In conjunction with images of mukhtars burning dollars in support of Erdogan, the current economic crisis in Turkey is shrouded in conspiracy. At the Turkey-Kyrgyzstan Business Forum, Erdogan blamed foreign intervention for Turkey’s woes claiming:

“They try to cast doubt on Turkey’s strong and solid economy via currency manipulations”.

Erdogan himself is likely to see such financial speculation as a personal attack, giving his control over the Turkish economy following the transformation of the government into an executive presidency. Here Erdogan holds the right to appoint the governors of the central bank, and has appointed his son-in-law as finance minister. Moreover, Erdogan’s power over the Turkish economy is increasing. This month, it was reported that Erdogan has appointed himself as chairman of the country’s sovereign wealth fund, with his son-in-law as deputy. Nevertheless, despite motivations for financial speculation, such political dynamics are having a real impact on the Turkish economy and foreign investment.

Avoiding Catastrophe?

The Lira’s free-fall appears to have stabilised following a pledge of USD 15 billion in Qatari direct investments. However, according to a Reuters poll, economic growth is set to slow down to 3.3 percent this year, the current figure being 5.2%. That said, today Turkey’s central bank is meeting to decide whether or not it should raise interest rates. Although Turkey’s economy is no longer in need of higher rates, this move is set to increase investor confidence. Will a marked increase help to restore the central bank’s credibility and international standing? Watch this space.

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