Turkey has been in the news for a while now for some pretty dramatic reasons. In 2013 there were wide spread protests that slowly turned into anti-government sentiments. In 2016, there was an unsuccessful coup that was attempted to overthrow President Erdogan’s government. The failure of the coup was followed by a large-scale purge. Following the attempted coup, things have gotten pretty bad. The 2018 Presidential elections were pretty dramatic with a fierce political battle between President Erdogan and other contestants.
The political tensions have also translated into economic problems. Inflation is a major challenge as in August it soared to a 15 year high of 18%. The Turkish Lira has nearly halved in value in the past few months over concerns regarding its financial troubles. There is a fear that this could spill over into neighbouring countries with some even going so far as to calling it a possible trigger for a global financial crisis. With many European banks and investors having invested substantial amounts in the economy, the risk is real. In today’s interconnected world, there are a lot of cross border flows. Spain may perhaps be the largest international lender in Turkey. While the risk of a contagion is real given the inter-connectedness, the magnitude may perhaps be over blown.
Outside help is extremely critical to help stabilize the Turkish currency, financial sector and economy. Qatar has stepped in with a $15 billion aid to turkey, which has given Turkey some respite. However, this may not be enough to solve the problem. With problems in other emerging economies, the concern over Turkey is significant. With the US driving most of the pain due to the fight between President Trump and President Erdogan, there is a chance for China and Russia to step in and play a more active role. Turkey and Russia have started negotiations to continue trading without the use of the dollar. Perhaps other countries could be persuaded to step in and help given Turkey’s geopolitical importance.
The IMF has bailed out Turkey in the past. However, President Erdogan has made it clear that Turkey doesn’t want any assistance from the IMF. The finance minister, who is also the President’s son-in-law, made it clear that the country will not be seeking any bailout. A bail out would also have political implication in the country given President Erdogan’s image. The bailout would also require compromises which would have long term implications on the economy and the voter base.
President Trump has continued to hit Turkey with multiple tariffs. The import tariffs on Turkish aluminium and steel were doubled by the white house with Turkey responding with its own retaliatory measures. The issue of contention between the two, concerns a religious figure from the US who has been detained in Turkey. The person’s release is of importance to the US government and the President’s voter base. This would in turn have implications for many political careers. On the other front, sanctions on Turkish cabinet members have also been put.
Turkey’s growth has largely been fuelled by international money in a low interest environment. With interest increasing, the sustainability of the flows has come under question. With heavy foreign dependence for energy and other imports combined with exports being hit with tariffs in the US, Turkey is in a tight spot. The recent political developments in the country have also spooked investors. Following the failed coup, businesses with assets of US$, 50 billion were taken over by the government. The independence of the central bank has also come under question.
The challenge for US-Turkey relations is two way. While the US may step up the pressure in order to get their citizens back, there is only so much that can be done while keeping Turkey as an ally. Beyond a point, Turkey may start drifting and seeking new alliances and strengthening other alliances. The relationship between the United States and Turkey is tense and is reaching a point of inflection. The EU may also step in given that the US is the common source of many economic woes. However, given the current economic situation in many parts of Europe and their own political climate, it may be difficult to put together a package in time.
Picture Credit : macleans.ca