The Turkish lira recently cratered to a record low against the U.S. dollar as the nation faces the grim reality of a Coronavirus-induced financial crisis. A crumbling currency, a cratering economy, and a corrupt government – the country might be putting together the ingredients of an economic collapse and become the first emerging market to fall in the new global economy.
A Currency Crisis
Turkey captured international business headlines when the lira plunged to 7.4900 to the greenback, passing the previous historic low of 7.236 during the August 2018 currency crisis. With Ankara preparing to endure a full-year recession, the lira is forecast to weaken even further, though it has rebounded since touching all-time lows. For a population that views the exchange rate as an indicator of the broader economy, it is understandable that business confidence and consumer sentiment are diminishing.
The Banking Regulation and Supervision Agency (BRSA), Turkey’s chief banking regulator, thought it was doing the right thing by limiting foreign investor access to lira-denominated transactions. Citigroup, UBS Group AG, and BNP Paribas were the first three banks to face restrictions. The purpose of the move was to place a ceiling on speculation and short-selling. It immediately backfired as the lira endured the wrath of a massive selloff.
However, the measure might have been more of a catalyst since the central bank’s credibility and reputation have been called into question. Year-to-date, the institution has gone through approximately $30 billion from its foreign currency reserves with the objective of lifting the lira against the dollar. Its gross reserves stand at $86 billion – the lowest level in two years. A troubling development, but the biggest problem is that it possesses roughly $168 billion in foreign currency debt, and it will require external financing to cover most of these obligations due over the next 12 months.
There had been hopes that the Federal Reserve would rescue Turkey. In March, the U.S. central bank added several nations to its dollar swap lines efforts – an initiative that enhances liquidity conditions in dollar-funding markets during economic downturns – but policymakers chose to ignore Turkey. Thomas Barkin, president of the Richmond Fed Bank, said that the Eccles Building would only engage in swap lines and bilateral arrangements with other countries who have a “mutual trust.”
Finance Minister Berat Albayrak reassured investors that its forex reserves were sufficient. Without a fresh injection of foreign cash into the Turkish economy, it is hard to believe the president’s son-in-law.
A Turkish Bailout
Even before the pandemiconomy, Turkey’s economic conditions had been deteriorating. The national debt is more than $200 billion, the unemployment rate is just under 15%, and the annualized gross domestic product (GDP) has been steadily declining since 2014. The Coronavirus has exacerbated the bearish situation; Turkey has about 137,000 cases and nearly 4,000 deaths.
President Recep Tayyip Erdogan has stated that his government has managed the outbreak better than any other nation. This might be difficult to gauge due to the paucity of transparency. Whatever the actual situation may be, the federal budget will be further squeezed throughout this public health crisis. Erdogan announced billions in funding for businesses, unemployment assistance, and debt and mortgage payment deferrals. The central bank also slashed its benchmark interest rate by 100 basis points to 8.75% last month.
A recent Reuters poll of 40 economists forecasts the economy will contract in 2020 for the first time in a decade. The median estimate is –1.4% this year, with an 8.6% decline in the second quarter and a 5.3% drop in the third quarter.
For weeks, there had been speculation that Turkey would receive a bailout from the International Monetary Fund (IMF). President Erdogan has been opposed to the recommendation for nearly a month, noting that the national economy is resilient. But he may have no other choice due to its dwindling economic, fiscal, and monetary resources. It is going to need a lifeline to keep its head above water.
Kemal Kirişci, a non-resident senior fellow at the Brookings Institute, wrote in a recent analysis that Turkey could anticipate experiencing “more of the same authoritarian politics”:
“As the country begins to open up, Erdogan’s policies and narrative suggest that the country should expect more of the same authoritarian politics. It is doubtful that this will help to solve Turkey’s persistent economic and political problems that have been exacerbated by the pandemic.”
That said, the president may see the writing on the wall as he has resuscitated his application for membership in the European Union. He urged the two sides to “revitalize” their relationship since “we are all in the same boat,” alluding to the COVID-19 pandemic as evidence for the need to unify. Perhaps this is the mechanism to allow Turkey to receive external financing and ensure Erdogan saves face.
Could Turkey become the first emerging market to fall to the Wuhan Coronavirus economy? Many of these vulnerable developing countries were already on shaky ground, and the virus outbreak exposed their fragility. Turkey is no exception. In Ankara, The risks were already mounting in the months leading up to the global pandemic. Traders are now expecting defaults, insolvencies, and contractions as the new norm for the foreseeable future. Be it by the European Union or the IMF, Turkey will inevitably be bailed out from Erdogan’s incompetence and one-man rule.
Read more from Andrew Moran.