Turkey: Economy runs into serious headwinds – NBF

Analysts at NBF explain that in Turkey, Erdogan owes much of his political success to the fact that he has presided over a long period of strong economic growth.

Key Quotes

“However, there are growing fears that Turkey’s economy rests on increasingly shaky foundations.”

“While government debt levels (28% of GDP) remain well below the average for most European countries, Turkey depends heavily on foreign capital. Its current account deficit (one of the largest in the world) stood at 5.6% at the end of 2017, up from 3.8% the previous year. The country’s external debt (both private and public) nearly doubled from 38% of GDP in 2008 to almost 70% today ($450 billion) – the world’s largest foreign debt load relative to GDP for an emerging economy. The private sector accounts for 70% of this debt.”

“Complicating matters further, most of the foreign investment in Turkey is comprised of short-term portfolio flows into stocks and bonds, as opposed to more stable long-term investment in companies and infrastructure.”

“While these vulnerabilities are not new, the changing dynamics of the global economy has increased their risk. For starters, monetary policy tightening in the United States is pressuring the currencies of emerging markets: the Turkish lira is down more than 18% against the USD year-to-date (and more than half its value since 2013). This in turn makes it harder for Turkish companies to service their foreign debt. Currency depreciation coupled with rising oil prices have also contributed to widening the country’s current account deficit.”

“This dynamic has likely been worsened by Erdogan’s unconventional economic view that higher interest rates are what drive inflation, not the other way around. It is also suspected that he wanted to avoid raising the cost of mortgage payments and credit card bills just before the June 24 elections.”

“However, Erdogan was recently forced to capitulate to market pressures and finally allow the Turkish central bank to raise interest rates by 300 basis points to 16.5% in an attempt to halt the slide of its currency. We can now expect Erdogan to blame the currency rout on foreign powers.”

“The IMF estimates Turkey’s economic growth will slow to 4.3% this year from 7% in 2017. However, it is important to note that this projection was made before the country experienced a sharp currency devaluation and a spike in inflation. More recently, Moody’s downgraded its forecast for Turkey’s GDP to 2.5% this year, down from a previous estimate of 4%.”