The Turkish economy soared into 2018, posting some of the largest economic growth rates in the world, as well as, unfortunately, a plethora of vulnerabilities that had been accumulating for many years. Turkey has had a long-standing current account deficit, which increased to $51.6 billion cumulatively in January 2018. A current account deficit is a measurement of a country’s trade when the goods and services a country imports is greater than those it exports. The Turkish economy has relied heavily on capital inflows to fuel its astonishing private sector growth, often borrowing in foreign currencies. In 2018, Turkey was required to find $200 billion to finance its large current account deficits and maturing debt payments; the nation’s corporate foreign currency debt stood at $214 billion, net of their foreign-exchange assets.
Erdogan has been an outspoken critic of the west and has often blamed Turkey’s economic woes on the west.
The nation’s problems have been further exacerbated by the erratic decision-making of Recep Tayyip Erdogan, the nation’s president. Erdogan has been an outspoken critic of the west and has often blamed Turkey’s economic woes on the west. For example, in 2018, the Trump administration placed trade sanctions on the country, involving goods such as steel and aluminium.
Erdogan has long voiced the need for a new constitution in Turkey. He engineered constitutional amendments in 2017 granting himself executive powers over the republic. Previously, Turkey had adopted a parliamentary system. However the adopted changes would lead to a highly centralised presidential system. The post of prime minister was abolished, and the position of the president which, under the old system had limited powers, gained significant new powers – one of these being the ability to appoint new judges and senior members of the bureaucracy, such as governors of the central bank, without consulting parliament. This allowed for the judiciary and the bureaucracy to be packed full of his loyalists and supporters. The political instability, increasingly undemocratic decisions and Erdogan instigating political disagreements put further strain on the relations between western nations and Turkey, leading to investment inflows declining from major sources such as France, Germany and the Netherlands.
The effect of these institutional changes has been far from positive, the state has become increasingly authoritarian, jailing journalists and political opponents, and the president’s inner circle is now largely made up of family members. On July 9 2018, a new economic chief was appointed, Berat Albayrak, who is the son-in-law of the president. Within 3 hours of his appointment, the Turkish Lira lost 3.8% of its value due to investors’ unease about the competence and orthodoxy of economic policymaking.
In October 2018, inflation stood at 11.9%, the highest rate since the financial crisis of 2008 and substantially higher than other emerging markets. In 2018, the Lira’s exchange rate started to rapidly decline from 4 TRY per USD in late March, to 5 TRY per USD by early August. The accelerating loss of value has generally been attributed to the lack of confidence in the administration and the central bank’s inability to make necessary interest rate changes to halt the high levels of inflation, through prevention by Erodgan, who holds the unorthodox view that high-interest rates are “the mother and father of all evil”.
public restructuring requests from some of the largest Turkish companies had totalled $20 billion
During the emergence of the currency-debt crisis in 2018, Turkish lenders and creditors were hit with huge corporate restructuring costs by companies that were faced with seemingly unpayable foreign currency-denominated debt due to the loss of value of their earnings in Turkish Lira. By early July, public restructuring requests from some of the largest Turkish companies had totalled $20 billion, including a buyout of Turk Telekom, Turkey’s biggest telephone company. Creditors were forced to make a special purpose vehicle to acquire Turk Telekom in order to solve the biggest debt default in Turkish history. As a result, banks raised interest rates for business and consumer loans up to 20%, curbing the demand from businesses and consumers. The Lira was propped up by an immediate sell-off of $7 billion in foreign assets by the central bank and a pledged Qatari investment of $15 billion.
Recently, the Turkish Lira has performed exceptionally poorly. The planned expulsion of ambassadors from several countries including the United States, Germany, and France, several interest rate cuts from 19% to 15% amidst the highest inflation the country has seen in 20 years at 36%, and Erdogan doubling down on his unorthodox monetary policy, declaring an “economic war of independence”, have all led to the currency losing 57% of its value since the beginning of the year.
Despite the introduction of measures to protect Lira-denominated deposits and to encourage the conversion of foreign exchange deposits to Liras as well as another aggressive sell-off of $7 billion by state banks, the currency has once again lost value. The absence of steady growth, unorthodox economics and lack of autonomy within the central bank has led to considerable risks of financial contagion, and slowly, Turkey’s economic ruin.