The Turkish economy is in deep trouble. The lira lost 20% of its value against the U.S. dollar on Friday.
The reasons for that were varied, and it was a storm many saw coming. However, what brought it faster than expected was the political climate and the poor state of Turkey-U.S. relations, largely due to the treatment of pastor Andrew Brunson by Turkish authorities.
Brunson has been a U.S. citizen resident of Turkey for the last 23 years. He operated a church in Izmir with a small congregation of 25 regulars. He has been held in prison for the last two years over alleged relations with the Kurdish Workers’ Party and ties to the alleged leader of the coup against President Erdogan, Fethullah Gülen.
Over the last few years, Turkey has had a meteoric rate of growth in her economy, surpassing even China and India. That growth, however, was propelled by foreign currency debt. Turkey borrowed a lot of money without having the reserves to support its own currency.
In order to support their countries’ economies after the economic crash of 2008, central banks around the world created a flood of money — Turkey relied on borrowing money, which helped with growth but created deficits in both the current and fiscal accounts.
Fiscal deficit means a government spends more than it makes; the current account deficit is when you buy more goods and services than you sell.
The crisis was a long time in the making — president Erdogan’s decisions on monetary policy didn’t give the economy much room to breathe. In spite of Turkey’s central bank suggestions, he insists on keeping interest rates low, which creates a high rate of inflation, giving a false sense of growth through rising in prices. GDP is the measure of all business activity that goes on in a country: higher GDP each year usually means the economy is growing, but it’s here that Erdogan tried to cheat a bit. Rising prices through inflation means that you end up with a higher GDP for the same economic activity. After a certain point, this creates mistrust in the markets, and when Erdogan placed his son-in-law as the minister of finance, investors feared that they would participate in a rigged game that would cost them a lot of money.
The coup de grâce to the already troubled economy came with the spat in the Turkey-U.S. relations and the economic sanctions/tariffs imposed by President Trump. That made any investment not only dangerous but downright idiotic.
What remains to be seen is how the situation will play out. Erdogan is autocratic, but he also is a rational actor with his country situated smack down in the middle of an area of vital importance to the interests of the United States. The wildcard here is President Trump; no President before him would dare act so publicly and so directly in order to resolve a dispute that concerns one man. That is what makes the whole situation so unpredictable and even flammable.