Conditions for a crisis in Turkey were ‘ripe’, according to Peter Coy reporting for Bloomberg, with a powder keg of financial weakness and poor economic policies in Turkey and other nations ignited by the showdown between presidents Trump and Erdogan.
President Trump’s decision to double tariffs on imported Turkish steel and aluminium on 10 August influenced the Turkish lira to plummet 18% on the same day – an extreme reaction to a “feather-light” 0.04% expected reduction in GDP, writes Coy. Yet this 0.04% “slap on the wrist” still sent shockwaves across markets worldwide, pushing down the currencies of Argentina, India, Indonesia, Mexico, Russia, South Africa, and Zambia.
According to Coy, the blame for the crisis lies firmly at Erdogan’s door, with mismanagement of the economy including measures such as exerting pressure on Turkey’s central banks not to raise interest rates – Coy refers to when Erdogan was quoted as saying high interest rates are “the mother and father of all evil”. However, raising interest rates, Coy reports, would have helped defend the currency and lower inflation.
Coy reports that the majority of economists are not predicting contagion, given that Turkey accounts for only 1% of the global economy, but the risk to Turkey’s fellow debtor nations is a real one. The fact that Turkish banks borrowed heavily in dollars will increase their financing costs and raises the risk of escalation into a full-blown debt crisis and contagion in vulnerable emerging markets.
President Trump’s doubling of tariffs followed sanctions that were introduced earlier this month against two senior Turkish officials, following the detention of American pastor and missionary Andrew Brunson. President Erdogan has accused the US of bullying tactics and economic sabotage in response.
Bloomberg article
A spiralling dispute But, it takes two to tango. In response to the steel and aluminium tariffs imposed by the US, Turkey has doubled tariffs on some US imports, including cars, alcohol and tobacco, Kareem Fahim reports in
The Washington Post. President Erdogan has also promised to boycott US-made electronics, including Apple’s iPhone.
Fahim says there is no sign of either side backing down over the dispute, with Turkey’s Vice President Fuat Oktay declaring that the US tariffs on metal were “deliberate attacks on our economy.” A White House statement said that Turkey’s imposition of tariffs was “a step in the wrong direction".
Fahim highlights the impact on business owners in Turkey, who are being negatively affected by the fall in value of the lira. Mehmet Emin Oymak, a camera shop owner in the Sirkeci district of Istanbul, summed up the prevailing mood. “People are more cautious. We don’t have customers. Nobody is buying anything.” He has been forced to raise the prices on his inventory of imported Japanese cameras and lenses as a result.
However, Erdogan’s request that Turks sell gold to support the lira has led to gold prices rocketing and gold shop owners struggling to shift their wares.
A foreign currency exchange stall where customers can also sell gold is thriving, according to Fahim. A 24-year-old employee named Erkan explained that “people want to take advantage” of the high price of gold, and also “help the state”.
Not all locals agree with Erdogan’s policies. Fahim quotes a local who works in an import-export business, Mustafa Bas, who says that the crisis did not start with Trump and that imports had been down for months.
The Washington Post article
A global fallout?While Turkey and the US might be at loggerheads, how does the rest of the world fit in to the crisis? According to
The Week, India’s rupee has dropped to an all-time low, reaching 70 rupees against the US dollar, while the Argentinian peso has fallen too.
The Week references an article by
Reuters, which claims that the fall of the Turkish lira by 40% against the US dollar has revived fears “of contagion that has been the sector’s Achilles heel for decades”.
The ‘Fragile Five’ – a term coined by a research analyst at Morgan Stanley reflecting economies that are too dependent on unreliable foreign investments and include Turkey, Brazil, India, South Africa and Indonesia – could also be under threat, according to the
Daily Telegraph. The article by Anna Isaac says the five “may be again treated as one asset class by investors [which] could trigger further capital flight from the countries, sparking a contagion that could spread through global markets”.
The Week also mentions the
Financial Times, which highlights turbulence in the emerging markets. Indonesia’s central bank reportedly stepped in to support the rupiah, while Argentina’s central bank lifted its interest rate by 5% to 45%, after the sixth day of the peso falling against the US dollar.
The article concludes with a mixed message. On the one hand, "Turkish Finance Minister Berat Albayrak has slightly stemmed the lira’s plummet by announcing that his government has drafted an economic action plan to ease investor concerns". On the other, Ulrich Leuchtmann, an FX strategist at Commerzbank in Frankfurt, is quoted as saying: "[The] big fear in the market is that we are headed for a full-blown emerging market crisis."
The Week article