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The Turkish economy is in serious trouble

Turkish authorities tried to manipulate international lira markets ahead of this weekend’s elections in order to prevent a slide in its currency.

The Turkish economy is in serious trouble
Garry white employee

Garry White

in Features


Economic mismanagement and provocative political posturing have almost brought the Turkish economy to its knees. The lira has collapsed, the price of food is up by almost a third, broader inflation is running at around 20% and interest rates are stuck at an eye-watering 24%. Unfortunately, ahead of municipal elections, President Recep Tayyip Erdoğan appeared keen to make the situation even worse.

On Sunday, Turkey held mayoral and council elections in its major cities. The economic crisis that has engulfed the country result in President Erdoğan’s Justice and Development Party losing control in places such as Ankara, although he has already cemented his executive powers at the national level. Unsurprisingly, he is keen to prevent this happening and is prepared to use a whole host of unorthodox measures to try to stop it, including the peddling of conspiracy theories.

Last weekend, JP Morgan issued a note to clients indicating it expected the lira to continue to fall against the dollar, as it had now breached a technical level. Following the great financial crisis and continuing revelations of industry misdeeds, bankers are easy targets for authoritarians seeking a scapegoat – and the timing of JP Morgan’s note was perfect for Ankara. The Turkish government accused the investment bank of issuing “misguiding and manipulative” information and President Erdoğan said “foreign groups” will pay a “very heavy price” for issuing reports that were a “provocation” to the Turkish state.

Unsurprisingly, the threats have stopped the flow of market analysis from banks within Turkey. But the absurdity of these statements has added to the sense of incompetence – and increased the amount of foreign investors wishing to exit from the market. To prevent an exodus, even more severe action was needed – and the next step was for Turkey to make it virtually impossible for foreign investors to access lira to build-up short positions or close trades. With the lira market essentially frozen until after the elections, a sell-off is likely when these unusual conditions are reversed.

However, the issues in Turkey have not been caused by international market participants “targeting” the country. Turkey has an excessive current account deficit and large amounts of private foreign-currency denominated debt, following the government’s massive infrastructure investment programme. The Turkish president has also been in a series of verbal spats with Donald Trump. One dispute, over imprisoned US pastor, Andrew Brunson, resulted in the US administration imposing tariffs on Turkish aluminium and steel imports. This week President Erdoğan also attacked Washington over its decision to recognise the Golan Heights as a part of Israel.

This external-debt-fuelled boom and political posturing has hit ordinary Turks hard. February’s consumer price index revealed that the highest annual increase was in the food and non-alcoholic beverage segment, where prices rose 29.25pc over the previous 12 months. Café and restaurant costs rose 20.43pc and furnishing and household equipment prices were up 27.59pc.

“It’s out in the open that games are being played with Turkey as the price of eggplants, tomatoes, potatoes, and cucumbers climbs,” President Erdoğan said during the campaign. “We will destroy the games of those who are terrorising with fruit and vegetables.”

But despite the fact that President Erdoğan blames foreign banks and profiteering for the price rises, this is simply not true. Over the last year, the lira has slid by around 40pc against the dollar, increasing the cost of imports of food, fertiliser and fuel. Farming areas of the country in the south west were also ravaged by storms in January. Nevertheless, an investigation into “food terrorism” against 23 supermarket groups was launched at the start of March and the government has set up its own stalls to provide discounted fruit and vegetables to the very poor. None of this is the fault of international bankers. It’s all down to President Erdoğan’s failure to understand how economics works and his tendency towards authoritarianism and cronyism, including the appointment of his son-in-law as the minister of finance last year. His belief that high interest rates cause runaway inflation is also just plain wrong.

The acceleration of Turkish authoritarianism resulted in Istanbul’s main stock index erasing almost all its gains for the year last week. Foreign investors may not have been able to access lira via normal market mechanisms to close any trades, but they could still dump equities to generate local currency and the BIST 100 index is down 12% from its peak on 19 March. Once the currency crunch is reversed, investors are also likely to be wary of investing in the country, so this week’s actions have probably caused some long-term damage to Turkey’s standing as an investment destination.

As the country’s economy descended into crisis, hedge funds and other foreign investors were attracted by the country 24% interest rate in the hope of making a quick buck. They now find themselves unable to exit positions and, when they find a way out next week, the value of the lira – and their investment – may have tumbled. The lesson here is that, just like the interest rates available from Icelandic banks ahead of the financial crisis and the returns offered by infamous fraudster Bernie Madoff, if an investment looks too good to be true, then it probably is.

A version of this article appeared in Friday’s Daily Telegraph.

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