The collapse of Turkey’s currency shows how vulnerable its economy is to crisis

If you occur to be a tourist in Turkey, consider yourself lucky. Otherwise, things look bleak.

Turkish lira it lost as much as one third of its value against the US dollar in lower than a month, and recently reached a record low. As a result, virtually overnight all imported goods became costlier. And because Türkiye is highly dependent for foreign goods, this included almost all the pieces, including gasoline, food, furniture and clothing. Turks fear that further price increases and possible deficiencies imported medicines are on their way.

He was the catalyst for the present crisis US sanctions, which the Trump administration imposed on August 1 after the Turkish government refused to hand over an American pastor who had been detained for nearly two years. Türkiye replied doubling the rates for American cars, alcohol and other goods. More US sanctions could also be on the way in which.

However, Turkey’s real economic problems go much deeper than the present dispute with the US and date back a few years. And while Qatar he promissed invest $15 billion to help Turkey and offered other helpdoes nothing to solve real problems.

We studied the Turkish economy – seventeenth largest on the earth – for 3 a long time, and recently visited the country, talking to Turks affected by the crisis, from small business owners and CEOs to blue-collar employees and taxi drivers. To understand how it began Jealousy With Muslim world to the brink of collapse, one must first have a look at Turkey’s recent history.

A missed opportunity

Late 2000s Türkiye he suffered banking crisis that caused significant and serious capital flight economic recession.

The International Monetary Fund agreed to lend to Turkey $19 billion provided it reviews and restructures its economic system and opens its economy to the remaining of the world. As the coalition government began to implement structural changes, the crisis paved the way in which for Recep Tayyip Erdogan and his Islamist Justice and Development Party, known by its acronym AKP, which had long remained within the shadow of Turkish politics a distinctly secular republic.

Erdogan proposed a “fair” alternative a long time of high inflation and economic and political instability, and voters wanted change. His party promised this within the face of doubts each at home and abroad join the IMF program and likewise declared that he stays faithful to the secular founding principles of the Turkish Republic.

The AKP kept its word and fulfilled the terms of the stand-by agreement with the IMF. This was helped by the appliance to join the European Union as a full member, launched in 1999. The accession process played a task vital anchor and a signal of the economic and social path of modern Turkey.

The the economy boomed in consequence, partly driven by strong global growth. Inflation fell to single digits for the primary time in about 30 years, the economy grew a median of 6.8 percent a 12 months between 2002 and 2007, and by 2012 exports greater than tripled.

However, this rosy picture had a dark side. The Turkish economy became increasingly depending on imports and foreign money to support much of this growth. When a rustic imports more goods and services than it exports, it funds the difference by borrowing abroad, making a current account deficit. This made Turkey vulnerable to the whims of international investors within the event of a crisis.

The costs of “endless growth”

These who warned problems lurking beneath the surface were resolved when Turkey survived the 2008 global financial crisis with minimal damage and bounced back in a short time, largely due to the restructuring of the economic system after 2001.

While the US and Europe they rolled in red inkTurkey’s low levels of household and company debt made this highly desirable place for foreign capital is searching for a comparatively protected home offering stable profits. As a result, the Turkish banking system was flooded with low cost loans, which financed the spending spree by households and corporations.

Meanwhile, the stand-by agreement with the IMF expired in 2008, and negotiations on the brand new agreement dragged on until the talks have been suspended two years later, when Erdogan announced Turkey’s “withdrawal” from this system. Instead, he believed he could push his economy toward “unlimited growth.” made it easier enabling Turkish firms to access loans denominated in foreign currency echange. This made them much more vulnerable to a decline in the worth of the lira.

Erdogan also began pumping in massive amounts of government resources public infrastructure projects like extensive highway systems, airports and concrete hospitals under public-private partnerships.

This, combined with favorable lending conditions, resulted the development sector is booming – especially amongst firms closely linked to the federal government. The central bank housing price index doubled from the start of 2010 to the top of 2016.

In turn, a dynamic economy helped, which bore fruit Erdogan continues to win electionsallowing him to gather more power.

But all this spending made the present account deficit even worse. As one illustration of the issue the foreign debt of the private sector increased from just 16 percent of GDP in 2003 to almost 40 percent at the top of last 12 months.

But at the same time as we watched these events with growing concern, Erdogan’s popularity and authoritarianism only grew, and in June became president with greatly increased powers to run the federal government as he saw fit.

One of the most important fears now is that the currency crisis will lead to the severe capital flight that crashed the economy in 2001. A recent central bank study forecasts inflation reach over 16 percent by the top of the 12 months.

Worse still, Erdogan has historically escalated his attacks on central bank independence one of essentially the most trusted institutions within the country. The recent installation has already undermined the relative independence of Turkish regulators his son-in-law as Minister of Treasury and Financea month before the outbreak of the present crisis.

This undermines Turkey’s credibility within the eyes of foreign investors.

Where is Türkiye heading?

In the Nineteen Eighties and Nineties, Turkey’s important problem was political instability. Today the issue is the other: an excessive amount of power placed within the hands of one politician whose popularity and political power have made him unable or unwilling to see the Turkish crisis for what it is.

Instead of addressing any weaknesses within the economy, Erdogan doubled down blaming the West, especially the USA, for spinning “economic attack” on Turkey.

So where is Türkiye heading? As we will see, it has 4 options.

The least likely scenario is a return to the long-abandoned IMF plan, which would cut back the simple credit that Erdogan sees as essential for economic growth. Since Erdogan denies even the existence of a structural problem within the Turkish economy, this is probably unwise.

Another option is for Turkey to implement its own stabilization program, perhaps with some EU support, mainly by alleviating Turkey’s short-term problems. However, for a range of reasons, including past tensions and an absence of financial ties, this seems little more likely than a return to the IMF.

A 3rd option is for Turkey to obtain more aid or loans from non-Western countries with spare money – akin to China, Russia and Qatar – to solve its short-term financial problems. As we noted earlier, this may not be enough to solve Turkey’s serious structural problems. The high costs could be further separation from NATO – of which it is a key member – and a greater strain on its relations with the US

Of course, the Turkish government could simply proceed to deny the issue exists, blame all the pieces on outsiders, and use the crisis to further consolidate its political power within the business community. In this sad scenario, current trends will proceed and Turkey will likely experience even higher inflation, bankruptcies, soaring borrowing costs, higher debt and lower economic growth.

Türkiye is entering the period of the Muslim holiday called the Feast of the Presentation. Some Turks may wonder if their economy might be the victim this 12 months.