Turkey’s Economic Meltdown Could Have Repercussions for Global Market

On August 13, Turkey’s central bank promised that it would “take all necessary measures” to stabilize its economy, starting with providing its banks liquidity in the face of the collapsing Turkish currency, the lira.

On August 13, Turkey’s central bank promised that it would “take all necessary measures” to stabilize its economy, starting with providing its banks liquidity in the face of the collapsing Turkish currency, the lira.

On that same day, the currency reached an all-time low, when it depreciated to 7.24 lira to the U.S. dollar in the Asia-Pacific market.

JP Morgan noted on August 10 that the depreciation of the lira was roughly 42% against the U.S. dollar this year, and was down 22% this week alone. According to the British newspaper, The Independent, the lira is currently the worst performing currency worldwide in 2018, surpassing even the Argentinian peso. While the meltdown of the Turkish economy is undoubtedly of concern in and of itself — indicating the country’s long term severe economic mismanagement — the greater concern is that the current foreign exchange crisis has the potential to mutate into a much larger economic one that could send shock waves throughout the global financial system.

Economic trouble has been brewing in Turkey since President Recep Tayyip Erdogan took over the presidency in 2012. In particular, inflation rates reached 16 percent in July. Yet, Erdogan has repeatedly refused to raise interest rates to rein in inflation and slow economic growth, instead hoping that cheap credit would drive economic growth. Meanwhile, major account deficits have risen, totaling $33.1 billion in 2016 and $47.3 billion in 2017, and the 12-month rolling deficit reached an estimated $57.1 billion in April, 2018.

In May, Standard & Poor lowered Turkey’s credit rating to ‘BB-/B’ from ‘BB/B.’ The global credit rating agency explained, “[W]e are downgrading Turkey because of what we view as increasing macroeconomic imbalances . . . . In this context, the downgrade reflects our concerns over a deteriorating inflation outlook and the long-term depreciation and volatility of Turkey’s exchange rate.” Ankara’s next sovereign rating, scheduled for August 17, 2018, is unlikely to improve given the current economic circumstances.

Economic trouble has been brewing in Turkey since President Recep Tayyip Erdogan took over the presidency in 2012.

The depreciation of the currency is mainly due to foreign investors concerned over the health of the Turkish economy selling the lira in exchange for other currencies. When that happened, the Turkish lira flooded the foreign exchange market and pushed down the price of the lira. Some analysts and investors have expressed concern that the collapse of the lira could spill over into other emerging markets, such as Indonesia, China, the Philippines, and others.

As reported by Business Insider, in response to the drop in the Turkish lira, the South African rand initially fell by 10 percent against the dollar, but has since pared back its losses. The Indian rupee hit a record low against the U.S. dollar on August 14, and the Argentinian peso took a hit as well.

To make matters worse, on August 2 the U.S. imposed sanctions on Turkey to try to coerce it to release American Pastor Andrew Brunson, an evangelical from North Carolina who has been detained in Turkey since October, 2016 over allegations of links to political elements responsible of the coup attempt against Erdogan. The sanctions targeted Turkey’s ministers of interior and justice, both of whom the U.S. charges as being responsible for the arrest and detention of the pastor.

White House Press Secretary Sarah Huckabee Sanders stated in a press release on August 1, “[W]e’ve seen no evidence that Pastor Brunson has done anything wrong, and we believe he is a victim of unfair and unjust detention by the government of Turkey.”

Ankara retorted that American calls for the pastor’s release are unacceptable. Turkish Foreign Minister stated on August 1, “[W]e call on the US administration to row back from this wrong decision. Without delay, there will be a response to this aggressive attitude that will not serve any purpose,” according to the BBC.

The latest blow to the Turkish economy came on August 10, when Trump imposed double tariffs on Turkish steel and aluminum. He tweeted the same day, “I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!”

President Erdogan has kept true to his promise to retaliate, announcing on August 14 that Turkey would boycott American electronic products and escalating the dispute between the two NATO allies. He stated in a televised speech, “[W]e are going to apply a boycott on America’s electronic products . . . . If they have the iPhone, there is Samsung on the other side,” referring to substitute products produced in South Korea or Turkey. On August 15, Erdogan slapped double tariffs on certain U.S. imports including passenger cars, alcohol, and tobacco.