By Polen Türkmen
Editor-in-Chief, Philosophy Undergraduate
If you have been watching the news over the summer, you will have noticed that one of the G20 countries, the eighteenth-largest economy in the world, plunged into a deep currency crises. Between January and August of 2018, the Turkish lira against the US dollar, lost 34% of its value. In this article, I will briefly explain the economic decisions and causes that led to the gradual loss in value of the Turkish lira, the political and diplomatic tensions wrapping the crisis, and some of the eventual outcomes.
Cause 1: The foreign currency debt
Turkey’s economy is not foreign to having a large current account deficit; the gap between Turkish imports and exports was replaced with borrowing foreign currency from abroad. Since the 2008 financial crisis, investors have been searching for greater yields in emerging markets. With low interest rates, Turkey was an attractive choice. To finance deficits and uphold large government spending on major construction projects, external funds came to the help of the Turkish economy. In the meantime, consumption increased alongside government approval. On 18 April, President Erdogan announced that the general elections will be eighteen months earlier than expected, scheduled to be held on 24 June 2018. During the Turkish general election, President Erdogan maintained his position as president although his Justice and Development Party (AKP) did not achieve majority in parliament. Having formed an alliance with the Nationalist Movement Party (MHP) however, this majority was obtained. It is important to note that despite his popular support, President Erdogan’s management of the economy in recent years, in the form of unorthodox economic policies such as low interest rates has led to a decrease in confidence for investors.
Cause 2: President Erdogan’s intervention with the central bank
On 21 February, Cemil Ertem, a leading economic adviser to the president released an opinion editorial in the Daily Sabah claiming that the International Monetary Fund’s (IMF) policy advice for the Turkish central bank to raise short term interest rates must be dismissed, and that “not only Turkey, but all developing countries, should do the opposite of what the IMF ” Naturally, this furthered the loss in confidence in the Turkish market. On 14 and 15 May, however, President Erdogan amplified the problem with his remarks on a televised interview with Bloomberg, as well as his words at a meeting in London with global money managers. He claimed that once he retains power after the general elections, he would overtake more control over monetary policy, the central bank and the general Turkish economy, and would further lower interest rates. The effects of this were felt strongly amidst investors and raised questions as to what would be done in regards to the high inflation rates, and the devaluation of the . His words began to manifest on 9 July 2018, with President Erdogan appointed Berat Albayrak, his son-in-law, as the economic chief of administration which he reshuffled post-elections, as the head of ministry of treasury and finance. It was no surprise that this appointment caused further turbulences with investor confidence, causing the Turkish lira to slip by 3,8% in value within one . A few hours later, President Erdogan, utilising his newly-acquired powers of presidential decree, announced himself as the authority to appoint important positions within the central bank and monetary policy committee . Recently, on 12 September, appointing himself as the chairman of Turkey’s sovereign fund, he dismissed the whole management team at the . Such interventions came with prior warning, but their swift implementations will have no doubt caused, and will continue to cause, deeper ripple effects in confidence than predicted. Given the current scenario, concerns over the central bank’s independence also appear justified.
Cause 3: Tariffs imposed by Donald Trump
When calendars showed 9 August, President Erdogan rallied his supporters and preached them to dismiss the “various campaigns under way against Turkey”, and exclaimed, “If they have dollars, we have our people, our righteousness and our God.” What he was referring to was none other than their NATO ally, the United States, with whom ties had grown increasingly strained over the last couple months. These words tumbled the lira overnight by 10% against the USD, which stood at an exchange of six lira for one US dollar. The campaigns Erdogan refers to include the US contributions to Syrian Kurdish forces, Turkey’s request for the extradition of Fetullah Gulen, held responsible for the failed coup of July 2016, as well as Turkey’s interest in the purchase of a Russian missile system. The latest crisis escalated over the 2016 imprisonment of an American pastor, Andrew Branson for allegedly being linked to a terrorist organisation. The response by President Trump was severe, in form of economic sanctions, doubling tariffs on aluminium and steel. In return, on 14 August, President Erdogan announced his new policy of boycotting American electronic . The ping-pong demands and sanctions between the two allies will have to subside over time given that Turkish exports to Russia mount to 1.2%, whereas they total up to about 50% to the US and EU member states, in form of mainly oil and gas. Similarly for Turkish imports, only 5.6% originate from Russia, a minuscule portion compared to more than 40% of imports coming from the US and the EU. There is a similar trend with more than 50% of foreign direct investment in Turkey originating from the US and EU states whilst only 6.1% of it can be traced to . Whilst relations with the US gradually mend (given the above figures, they must), Turkey should seek opportunities in growing closer to its European allies, and be cautious of an alignment with Russia which could harm its increasing reputation as an increasingly authoritarian state, and alienate itself from its NATO allies. This cooperation is also important, because if Turkish banks struggle to pay off their short-term foreign payments, this will also hurt Spain’s BBVA, the French BNP Paribas, and Italy’s UniCredit as they have considerable operations in Turkey and act as important lenders.
To some, there are a few policy changes that could be implemented to solve the lira crisis. One of them is to hike up the interest rates, which President Erdogan has staunchly been opposing. If the central bank were truly independent, President Erdogan’s position on this would not have a significant bearing on the central bank’s actions. As previously noted, with the latest presidential decrees, there are justified concerns that this independence may be compromised. Another way out would be a currency fix as Steve Hanke, a professor of applied economics from John Hopkins University suggested. In order to stabilise the currency, Turkey would have to adopt a currency board, fixing the exchange rate of the Turkish lira. This however would lead to Turkey abandoning its discretionary monetary policy and does not seem to solve the problem in the long-term given the complexity of the crisis. Another option, unpopular with President Erdogan as well, is to turn towards a potential IMF bailout, following Argentina’s footsteps. President Erdogan’s popular support also rested in his anti-IMF stance. Throughout the years his policies led the country from being a borrower to a lender; it does not appear likely that he will easily accept IMF reforms that could include higher taxes. Regardless of the steps taken from here, one thing appears to be clear. The president’s nationalist rhetoric should not be taken lightly. In an age of increasing doubt in international cooperations, poor relations with Washington should be put on mend, and in the meantime, it rests on Europe to pull Turkey from slipping into nationalistic and isolationist trends and from furthering itself from its Western allies.
Featured photo provided by Bloomberg Market Data
First photo provided by Twitter
Second photo provided by FT Market Data