The Turkish Lira has fallen a hefty 20.3% year-on-year. And that’s after the Turkish Central Bank intervened to prop up the Lira by boosting interest rates by 3% last week. And there is more problems ahead. The Turkish economy is addicted to economic growth via debt fueled spending. Worse still, it finances this growth with hot money inflows.
Accordingly, the Turkish economy is in the unpleasant position of raising interest rates to attract foreign capital. But if the Turkish Central Bank raises interest rates, it also risks stifling spending and the economy.
Hence, the Turkish economy is stuck between a rock and a hard place.
I am on a trip to Turkey right now and I can say without a doubt that the situation is grim. All the Turks I have spoken to are worried about an economic crisis.
That is because many Turkish businesses and consumers borrowed money in US dollars and Euros when the Lira was strong. Indeed, Turkey owes a staggering $450 billion to foreign creditors. To put that in perspective, that’s 52.1% ofTurkey’s GDP.
Hard currency deonominated debt makes up about a third of that. As the Turkish Lira has fallen, these debts have ballooned relative to the Turkish Lira.
Accordingly, many debtors are increasingly unable to pay back their debt. There is a growing chance of a repeat of the banking crisis that walloped the Turkish economy back in 2001. Moreover, this problem will continue to get worse before it gets better because …
President Erdogan Is Trying To Goose The Turkish Economy To Win A Election
President Erdogan is hellbent on securing even more power for himself in elections slated to take place on June 29th, 2018. Over the last decade and a half, he has won one election after another by leveraging the prosperity created by economic growth to win over voters.
He is banking on doing the same thing this time around. To that end, Erdogan has brow beat the Turkish Central Bank into keeping interest rates low to spur credit growth and construction. The Turkish government has also implemented numerous government programs to the same end.
This is like throwing jet fuel on a raging fire.
Consumers and businesses borrow at unsustainable levels and are buying up imports they can’t afford. This has blown out the current account deficit which is now running at a hefty 6.4% of GDP. This yawning deficit is giving pause to foreign investors.
Something will need to give. I doubt it will be President Erdogan. That means he will continue to push debt-fueled economic growth. This will exasperate the current account deficit and push the Turkish economy into another crisis. The only question is will it be before or after the upcoming election.