Recep Tayyip Erdoğan’s Turkey in the past two years has engaged in a remarkable series of active geopolitical foreign interventions from Syria to Libya to Cyprus and most recently on the side of Azerbaijan in the territory conflict with Armenia over the status of Nagorno-Karabakh. Some have called it Erdogan’s ‘New Ottoman Empire’ strategy. Yet a free-falling Lira and a collapsing domestic economy threaten to put an unplanned end to his grand geopolitical ambitions. How serious is the economic crisis in Turkey today and does Erdogan have a Plan B?
By the end of October, as open conflict between President Erdogan, who demands low interest rates from the central bank to stimulate growth, and financial markets who demand higher rates to “offset risk,” the Turkish Lira dropped a sharp 3% in a day. To date in 2020 the Lira is down 34% against the US dollar and by 70% over the past five years. While some think it would stimulate Turkish goods exports, what it is doing is exposing the entire Turkish banking system and economy to a colossal debt blowout. The problem is that to spur Erdogan’s growth agenda, Turkish banks have turned to the dollar-based low-interest rate inter-bank market to borrow funds to lend on to Turkish consumers to build houses or open hotels and other small businesses. Every time the Lira falls against the dollar, it needs that much more Lira to repay the old dollar debts, 34% more since January as of this writing.
Foreign investors, seeing the data, are rushing to liquidate Turkish stocks and bonds and exit, sending the Lira down further and hitting financial assets that back loans throughout the economy. Moreover inflation officially near 12% is adding to the crisis.
In recent years, spurred by Erdogan, the Turkish economy has expanded at an annual rate above that of China or India pre-corona. Most of that has been in the construction sector with new homes, shopping centers and tourism hotels booming. The problem is that now, with the Lira crisis showing no sign of end, and the EU states going into lockdown for coronavirus, Turkish tourism, the is being devastated. In August, peak foreign tourism season, tourism arrivals were down a huge 70% from August 2019.