Turkey “heading for economic meltdown” says Chatham House expert

Turkey “heading for economic meltdown” says Chatham House expert
Is Turkey's overheated economy going off the rails?
By bne IntelliNews July 20, 2018

Turkey is “heading for economic meltdown”, according to an article written by Chatham House’s Turkey Project manager and published by Time on July 20.

Looking at the likely path to be taken by Turkish President Recep Tayyip Erdogan now that he has secured his election as Turkey’s first ever executive president with sweeping powers, Fadi Hakura wrote that “Turkey’s president is doubling down on his singular approach to governance irrespective of the fallout. Notwithstanding his current political dominance, the deteriorating state of the economy is his Achilles’ heel and the biggest threat to his currently unrivaled leadership”.

The prospect of a meltdown being caused by 'Erdonomics' was raised by bne IntelliNews back in April.

Hakura also noted that “unsurprisingly, some major Turkish companies are negotiating with their bondholders to restructure their sizeable foreign loan obligations as lira devaluation increases the financial burden. Should a significant number of Turkish corporates default on their foreign obligations, this would reverberate across the Turkish economy, cause mass consumer panic, shake the confidence of international financial markets and potentially lead to a crisis within the Turkish financial system and to a deep and prolonged economic recession”.

Fifteen days after Turkey’s June 24 parliamentary and presidential elections, Erdogan appointed a new government under radically enhanced executive powers granted by the constitutional changes officially narrowly approved by last year’s referendum. He chose 16 loyalists and partisan figures “to ensure that he remains front and centre in decision-making and policy formation”.

“Most notably”, observed Hakura, “Erdogan sacrificed the former deputy prime minister and ex-Merrill Lynch chief economist Mehmet Simsek in favour of his inexperienced son-in-law Berat Albayrak as finance and treasury minister to manage the fragile economy. Whether he has the competence to placate jittery financial markets and foreign investors is debatable”.

Looking at Turkey’s economic imbalances, Hakura pinpointed how the corporate sector’s foreign-exchange liabilities climbed to a record $328bn as of the end of 2017. He added: “When netted against foreign-exchange assets, it is still a worrying $214 billion. Its US dollar and euro debt pile has more than doubled since 2008, 80 per cent of which is held by domestic banks. Given these acute balance-of-payments conditions, it is not farfetched that Turkey may impose capital controls in the short-to-medium term to restrict the outflow of foreign assets. At $50 billion, the current account deficit—defined as the sum of the trade balance and financial flows—is not even covered by the central bank’s net international reserves at nearly $45 billion.”

Related Articles

Four-fifths of economists in poll expect Turkey to hold interest rates at October 25 MPC meeting

Turkey’s central bank is likely to keep interest rates on hold at its monetary policy committee (MPC) meeting due on October 25, a Reuters poll showed on October 19. The Turkish lira (TRY) has ... more

Turkey switches to permanent daylight saving time

A presidential decree has made “GMT+3” the official permanent time zone of Turkey. The decree, published in the Official Gazette on October 2, revoked a cabinet ... more

Turkish markets rally but economy still seems set for severe recession: Capital

Turkish markets saw something of a rally last week, but the economy still seems headed for a severe recession, according to Capital Economics. Markets rallied amid ... more