Turkey has entered a full-blown currency crisis as the lira has slid nearly 40 per cent so far this year. President Recep Tayyip Erdogan blames outside forces for the currency’s collapse.
Turkey’s problems have been exacerbated by Mr Erdogan as he has grown increasingly authoritarian over the past decade, extending his power over all branches of government and gaining almost total control of the press, as well as by his unorthodox views on interest rates.
Markets have been concerned about the country’s wide current account deficit, rising inflation and the apparent reluctance of Mr Erdogan, who has dominated Turkish politics for 16 years, to allow the central bank to raise rates to defend the currency and quell inflation, which is running at double digits, well above the central bank’s 5 per cent target, and will be driven higher by the lira’s depreciation.
The lira came under fresh pressure this week as the US warned that new sanctions would be imposed on Turkey if a detained Christian evangelical pastor from North Carolina, Andrew Brunson, was not released (Mr Brunson is held in Turkey on terrorism charges). Mr Erdogan has refused to cave in to US demands.
The Trump administration already imposed sanctions on Turkish officials responsible for the pastor’s detention and doubled tariffs on Turkish steel and aluminium imports in a bid to force the release of Mr Brunson. In a confrontational move, Ankara raised tariffs on US cars, alcohol and cigarettes. Mr Erdogan also urged Turks to boycott US technology companies.
The lira’s sharp decline in recent months has piled pressure on companies with foreign currency debts (the burden of foreign currency denominated debt becomes progressively harder to service as the lira slides). Turkey’s corporate sector holds nearly $300 billion in foreign currency loans, nearly half of which mature in the next 12 months.
Investors have clamoured for a sharp rate hike to rein in inflation and prop up the lira. Mr Erdogan, however, is a self-declared enemy of high interest rates, insisting that high rates cause inflation rather than curb inflationary pressure, and is widely seen as exerting political pressure on the central bank. Mr Erdogan’s victory in the June elections triggered the transition to a new executive presidential system that gives him the power to directly appoint the central bank governor.
The current account deficit amounts to 6 per cent of GDP. The deficit needs to be financed with inflows of foreign money. Most of that funding comes from “hot money” flows that can change direction at a moment’s notice.
The economy grew 7.4 per cent in 2017. Berat Albayrak, Turkey’s treasury and finance minister and President Erdogan’s son-in-law, said that Turkey would focus on fiscal measures to slow down the economy and reduce the current account deficit.
Turkey’s credit rating was cut further into junk by S&P Global Ratings and Moody’s Investors Service on Friday.
Mr Erdogan has rejected the idea of making any appeal to the International Monetary Fund. On August 15th, Qatar, the world’s richest nation in per capita terms, announced it would invest $15 billion in Turkey.
Photo: Francisco Anzola
