Is the Turkey burned?

It is odd to get anxious about an economy which grew more than 7% last year, but it seems that the Turkish economy is in the middle of an economic storm. An autocratic economy which was a favorite among emerging market investors is seemingly dipping into recession. Turkey’s annual inflation rate has skyrocketed to 101%, and Lira has dropped around 50% in 2018 against the greenback. From a complicated relationship with the West to the failure in diplomacy; President Tayyip Erdogan has just one thing to say- “Damn Trump.”

How it all started?

The demise of the Turkish economy is partly a ridiculous consequence of sanctions imposed by America on Turkish metals. President Erdogan’s refusal to negotiate the release of American Pastor Andrew Burnson, who is on trial and accused of espionage in Turkey caused a diplomatic standoff between the USA and the Turkish delegation. The matter worsened on Friday when President Trump threatened to double the tariffs on Aluminum and Steel stating that the “diplomatic relationship with Turkey is not good.”

Why is Lira falling?

The Turkish Lira which started its year at 3.75 against dollar plunged to 6.3 causing a radical increase in the inflation rate of Turkey. The decline in the Turkish currency is exacerbated not only by the sanctions but also due to the failure of the central bank’s inability to increase the lending rate. The architect of such unorthodox monetary policy is President Erdogan who believes that a rate hike would not solve the issue but worsen it. With foreign debt soaring and strengthened dollar, Lira is in double trouble.

What is happening in Turkish markets?

The financial markets took a hit on Friday as a result of the escalating tensions. The iShares MSCI Turkey Invstbl Mrkt Index Fund plummeted 19.1 percent and is now down 53.4 percent year-to-date. The SPDR S&P 500 ETF Trust SPY declined 0.6 percent but is still up 6.2 percent overall in 2018.

Why is Europe nervous?

There had been a global sell-off overnight in equities, amongst which European financial sector seemed to be under stress. The European banks own a significant stake in Turkish lenders, and this turmoil puts Europe into massive risk.

What’s the plan?

President Erdogan blamed America and the foreign enemies behind the burndown. Apart from the blame game, the President has encouraged the public to boycott US electronic goods and buy more Lira calling it a “national struggle.” He also retaliated by slapping imposing tariffs on American cars and alcohol. The Finance Minister Berat Albayrak, who is also Mr. Edrogan’s son-in-law, vowed to defend the lira. The Central Bank of Turkey has assured to provide liquidity to the banks.

How is Indian Rupee affected?

The Indian Rupee breached the 70 mark against dollar primarily caused by the weakening of Lira. It can affect other emerging market currencies too.

What’s next?

The trade war has turned into a currency war, and both Erdogan and Trump refuse to stand back. The Turkish delegation can always negotiate the release of Pastor Andrew. However, it will not amend the relationship between Turkey and the West. Turkey’s inclusion in Europen Union also seems to be a far-fetched dream now.

While President Erdogan continues to blame America for his government’s incompetence, the imposed tariffs on Aluminum and steel can widen the Turkish crisis which can impact the global economy. America may be right in confronting the Turkish delegation, but its response and approach are counterproductive.

Meanwhile, President Erdogan, who is the leader of a liberal and democratic country continues to control the media, bureaucrats, and financial institutions. The Turkish economy needs to be stable which can be done by increasing the already higher lending rates or by borrowing assistance from IMF. However, it seems that economic stability is not enough amidst of the tilted political structure.

This fallout with the West is a match which if not controlled will burn down the Turkish economy and along with it could begin a global meltdown.