A spat with the United States and a deepening economic crisis plunged Turkey’s lira to an all-time low against the dollar on Friday, despite its finance minister announcing a “new economic model” to address mounting concerns.
The statement by Berat Albayrak, who is also President Recep Tayyip Erdogan's son-in-law, promised to "transform" Turkey's economy and to "rein in inflation", but lacked specific details. As Mr Albayrak spoke, US president Donald Trump took to Twitter to announce a doubling of US tariffs on Turkish steel and aluminium to almost half a billion euro.
It all comes at the end of a tumultuous week. Following Trump’s declaration on Friday afternoon, the lira plummeted to 6.50 to the dollar (7.32 to the euro), wiping a third off its value and capping the currency’s worst week for more than a decade.
Washington announced earlier this month that it would review Turkey's duty-free access to the US market in addition to placing sanctions on two Turkish cabinet ministers – Abdulhamit Gul, the justice minister, and interior minister Suleyman Soylu – after Turkey refused to release a jailed US pastor. While the sanctions are largely symbolic, threatening access to the US market places €1.45 billion worth of Turkish goods at risk.
Loyalists
Mr Albayrak took over as Turkey’s finance and treasury minister in July, further spooking investors who worry the president has established a circle of inexperienced loyalists to run the economy in place of independent economists.
The president on Friday made his latest in a series of calls for Turks to defend the lira by converting foreign currencies and gold into lira. “We will not lose the economic war,” Mr Erdogan said. “Just know that we are better than yesterday now, and tomorrow we will be better than today. Don’t worry.”
Mr Erdogan has for years insisted that high interest rates would lead to steeper inflation, despite conventional wisdom in the West maintaining just the opposite.
A central pillar of the ruling AK Party’s long-standing success has been its overhauling of the economy following a major economic crisis in 2000 and 2001. Inflation was reined in from highs of 68 per cent and huge construction projects provided millions of jobs.
In the 15 years Mr Erdogan has been in power, Turkey’s economy has grown and continues to do so. His stated ambition is for Turkey to become a top-20 economy by the time it celebrates its centenary in 2023.
These advances are now under threat. "The Turkish economy's current acute vulnerability to changes in international investor sentiment is a direct result of Erdogan's simplistic obsession with high growth rates and his failure to address the economy's structural weaknesses – and has been exacerbated by Erdogan's increasing domination of economic policymaking," writes long-time Turkey watcher Gareth Jenkins.
“Turkey has a chronically low savings rate. Much of the economic growth of recent years has been the result of increased consumption.”
Inflation
Financial analysts and Turks alike have been braced for an economic crisis since early this year, as inflation reached 15 per cent in July, the highest for 14 years. Since 2015, foreign direct investment has fallen away as terrorist attacks, the caging of independent media outlets and growing hostility to western countries scared off investors.
Turkey's relations with the US have long been on the slide, but the continued imprisonment and house arrest of evangelical pastor Andrew Brunson over charges of espionage, which he denies, have worsened ties.
Ankara says Brunson played a role in the failed July 2016 coup. Erdogan also wants the US to extradite Pennsylvania-based cleric Fethullah Gulen, who is blamed by Turkey for masterminding the botched coup. The US says there's not enough evidence to arrest the Turkish preacher.
Insiders suggest it was Erdogan's visit to London in May, the same trip that saw his photo with Arsenal footballer Mesut Ozil court such controversy, that made clear to London-based investors and bankers how out of touch the Turkish leader is with his country's financial predicament.
Global exposure to Turkey amounts to about €200 billion, with Spain’s BBVA, which owns Turkey’s Garanti retail bank, more exposed than other international lenders. The Basel-based Bank for International Settlements says Spanish banks are owed about €75 billion with lenders in France and Italy due €35 billion and €15 billion respectively.
