Turkey has little hope of coming out of this crisis in one piece. The pretend President Tayyip Erdogan, has come out and denied that Turkey is in a currency crisis. Exactly how he can even say that is rather shocking.
Nevertheless, he called a 25% drop in the currency a plunge that is just “fluctuations” that have nothing to do with economic fundamentals. He blamed the United States calling the collapse in the currency “missiles” of an economic war waged against Turkey.
The Turkish President’s economic policy is a disaster
This is reflected by his plea for Turkish citizens to search under their mattress for foreign banknotes and gold to convert into domestic currency. It has been his economic policies and dictatorship that is driving Turkey into an economic collapse. Of course, the only way to support the lira at this stage requires a change in government. That is unlikely on any voluntary basis.
The Turkish lira has begun to fall ever since Recep Tayyip Erdoğan became the 12th president of Turkey on August 28th, 2014. The last 4 years has produced nothing but a US dollar rally. The lira really began to break down in 2015 following his election. While his vision was to make Turkey a more important country with a dream of restoring the former glory of the Ottoman Empire, we can see in the chart that 2016 the dollar broke out of the channel technically and has begun the steady rally that can make Turkey the poster-child of the emerging market crisis.
The Turkish financial market has come under heavy selling pressure since last July. Turkey could be at the center of a new world financial crisis which is unfolding at first in the emerging markets followed by Europe. The Lira continues the immediate downward trend which has been ongoing since Erdoğan came to power and picked up speed after 2016 coup that he begun to kill opponents wholesale.
Turning to the Istanbul Stock Exchange, here too we also saw falling prices. The price of the leading index ISE National 100 plummeted during the second fortnight of July, from about 100,000 points to only 90,000 points. At the end of January, the price was around 120,000 points. The relationship between price and expected equity returns dropped to the lowest level in the past nine years. He has done more to undermine the confidence in Turkey than perhaps anyone else in history.
Looking at the bond market, the 10-year government yields rose by about 100 basis points on 12th of July in a single day, reflecting the collapse in public confidence. The 10-year bond stands at an almost 18% rate, which is up significantly from 10% a little more than one year ago. Inflation is now running at 15% level and during the hyperinflation period, it reached just about 15% per month.
Erdogan continues to try to consolidate power into a virtual dictatorship. He made his son-in-law Minister of Finance after the election and curtailed the independence of the Central Bank. He thinks he can simply manipulate the interest rates down by decree, which is just going to blow up in his face. He has simply increased global investors’ fears with his attempt to control the Central Bank and interest rates.
Central Bank of Turkey “will provide all the liquidity the banks need”
Generated fears about the future of the Turkish banks and their liquidity in particular has led the Central Bank of the country to issue a written statement pledging to offer “all liquidity” they will be needing.
Moreover, it raised foreign exchange deposit limits for lira transactions of lenders from €7.2 billion ($8.2 billion) to €20 billion ($22.8 billion) and lowered Turkish lira reserve requirement ratios by 250 basis points for all maturity brackets, and reserve requirement ratios for non-core FX liabilities by 400 basis points for up to three-year maturities, said the website, citing the Central Bank’s statement.
According to the country’s Treasury and Finance Minister Berat Albayrak the action plan effective Aug. 13 (earlier than initially planned) is destined to support the plunging Turkish Lira and soothe market concerns.
What is going on between Washington and Ankara and the Turkish economy?
Before Turkey’s presidential elections, held on June 24, by Erdogan’s decision, everyone in Turkey expected some sort of turmoil in the country’s economy, as the structural problems up to that time proved the need for economic measures. The devaluation of the local currency, the inflation hike, the rise in interest rates, the trade deficit, the current account deficit and the foreign exchange loans were only some of the obvious and visible signs that there were some problems.
However, no one had ever anticipated such a situation, with the Turkish lira depreciated against the dollar by about 40% only within 2 months, whereas the devaluation on an annual basis was over 80%. If this continues, it can cause unpredictable problems to Turkish businesses and banks.
This great upheaval is also thought to have been caused by the downward turn in U.S.-Turkish relations, on account of the States’ demand for the release of Pastor Andrew Brunson from Turkish prisons where he has been detained since October 2016 and now is under home arrest. Charges against him relate to his ties with the Kurdish PKK and FETO organization.
However, the issues in the relations between the two sides are more. The purchase of the S-400 Russian air defence systems from Turkey and Ankara’s relations with Moscow and Tehran have provoked the reaction of the United States, which, in “reply”, did not extradite Imam Fethullah Gulen to Turkey, who, according to Ankara, is the man behind the attempted 2016 coup against Erdogan. At the same time, the U.S. froze the sale of 100 F-35s to Turkey, despite their co-operation for their manufacturing and production since 2008.
The mistrust towards both sides was “present” also during the recent visit of the Turkish delegation to the States for talks; a meeting that did not bear fruit and whose unsuccessful result brought a severe, unprecedented downturn as the Turkish lira took a worse plunge.
Meanwhile, President Donald Trump responded to the collapse in the Turkish lira by announcing a doubling of tariffs on steel and aluminum. His logic is that the collapse in the lira would allow them to sell steel and aluminum at cheaper prices.
Erdogan, with his article in the New York Times, said that Ankara might seek new allies. He is planning a summit with Russia on the 7th of September in the Turkish capital Ankara. This is to be a four-person summit, which Erdogan has proposed as a distraction for the collapse in the lira. He will limit the summit to Germany, France, Turkey, and Russia.
However, there are people who hope that within the next week things might improve so as to avoid a deterioration in the relations of the two sides or in that of the Turkish economy. Turkey is a significantly important NATO ally, with the second largest army and it would be dangerous to see it moving away from the alliance. It hosts 3.5 million refugees from Syria and, according to European officials, is in line with the EU agreement regarding the refugee crisis. The coming week will be crucial for Turkey, but also important for NATO and the EU.
For further analysis about the deeper causes of Turkish economy’s collapse read our REPORT: TURKEY here.