Don’t Blame Trump For Turkey’s Woes

These past two days it would have been easy to get the impression that U.S. President Donald Trump is responsible for the currency crisis in Turkey.

Unfortunately, for Turkey, Trump is not the source of all their economic woes.

Overwhelmingly, the real problems are insane economic policies implemented under the rule of Turkish President Tayyip Erdogan.

Turkish President Recep Tayyip Erdogan. Photo by Murat Kula/Anadolu Agency/Getty Images

Last Friday the value of the Turkish lira fell 14% in dollar terms, according to data from Bloomberg. The drop came after U.S. president Trump imposed tariffs on U.S. imports of some Turkish industrial metals. That’s the reason that some observers see him as responsible for the currency crash.

However, that U.S. action is only the latest blow to Turkey’s beleaguered economy which has seen a massive currency devaluation over the past year.  Since August a year ago, the currency’s value has almost halved from $1 fetching 3.52 Turkish lira to recently fetching 6.43 lira.

Back in September, almost one year ago, I noted that the twin policies of easy money and massive government spending could lead the economy to overheat. You can read the piece in Middle East Eye, here.  In other words, the government was doing a lot to boost the economy with interest rates that were lower than the rate of inflation and a spendthrift approach to the budget.

Even back then the economy was booming and operating close to full capacity. I also noted that the credit boom would likely end with a thud rather than a smooth transition. I wrote:

As most people know, all parties must eventually end, and the bigger the festivities the more severe the hangover. Turkey will likely be no exception.

Indeed, that sorry situation seems to have come to pass.

Inflation is now running at more than 15% versus 11% back in September, according to data collated by TradingEconomics.

The same website notes that the country is also seeing problems with its trade balance, that is the gap between the value of exports and the cost of imports. It states:

[In the] first six months of the year, exports increased 6.3 percent and imports jumped 13.5 percent, thus widening the trade gap by 31.6 percent to USD 40.7 billion.

In simple terms, that means that the trade balance has deteriorated. 

That situation is likely to get worse going forward as the country continues to import the same volume of energy, its largest import category, but pays for the oil with now severely depreciated Turkish lira.

There’s another factor that is making things dire for Turkey. It owes approximately $62 billion in debt denominated in currencies other than the Turkish lira, according to Peter Tchir, a macro analyst at New York financial firm Academy Securities. Paying the interest on that debt will only get harder for Turkey the more its currency falls.

It would seem that doing something to reverse the drop in the value of the currency or at least stop it falling further would be a priority. Not so much in Turkey.

So far this weekend, the Turkish central bank hasn’t made a move to help prop up the currency. It could have done so late last month but passed on the opportunity much to the surprise of some investors.

A recent report from New York-based bank Brown Brothers Harriman now paints a bleak picture for the country.

The way things are going, we expect a hard landing for the economy in the coming months.  Markets await some sort policy response, but the longer Turkey waits, the worst things will ultimately get.

Not a pretty picture at all, and little of it to do with the U.S. President.

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