Crisis in Turkey: Seven Data Points to Keep in Mind

Turkey is facing some old problems and a series of new risks, and although the Turkish central bank has initiated certain reforms, new market disruptions are possible with broad economic and financial consequences. Bloomberg, in this context, outlines seven key points that traders, investors, governments, and central banks should keep in mind.

• The message from the exchange rate – these days the focus is on the value of the currency, but these changes are neither a driver nor a consequence of changes. They should be viewed as a very obvious indicator that can contain very important signals about changes.
• Imbalance has been present for some time – by continuously stimulating the economy through lending and, more recently, through the budget, Turkey has accumulated a twin deficit, an imbalance in the public budget, and a balance of payments. This imbalance has been financed through external borrowing and capital inflows, which has helped strengthen investments and growth, but the income generated has been insufficient to cover the debt.

>>>Crisis in Turkey – the lira exchange rate has fallen by 30 percent

• Although Turkey’s financial needs remain significant, the country is facing a more challenging external environment, which will not change anytime soon. As a consequence, the inflow of money will be less generous and more expensive. Some of the programs for large monthly cash injections have either stalled, as is the case with the Federal Reserve, or have been reduced, as with the European Central Bank.
• The economic situation of the country is further complicated by concerns about its economic management. Due to significant political pressure, there is weak confidence that the central bank is in a position to take decisive measures to stabilize the currency. Concerns about political interference in the central bank’s measures have been further heightened by the appointment of President Erdogan’s son-in-law as the chief economic coordinator in the government.
• Turkey refuses to seek assistance from the International Monetary Fund, especially since the Washington-based institution would certainly demand significant political adjustments, including some that are exactly opposite to Erdogan’s initiatives.

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• Turkish authorities may allow the lira to fall, but the question is how much this would cost the economy. Inflation has already risen, banks are under pressure, growth has slowed, and many local businesses are at risk. If this continues, recession, strong inflation, and more frequent bankruptcies are possible.
• In Turkey, there is increasing talk of the possibility of controlling the outflow of money and stopping the dollarization of the economy. This increases the private sector’s tendency to accelerate the separation from the local currency, bringing even greater financial and economic pressure.