With the President of Turkey Recep Tayyip Erdoğan blaming his country’s present currency weakness on an international plot that has made it a “target of economic war”, the idea that politics and economics make for powerful bedfellows is much in the news.
Elsewhere, the ongoing trade wars that form part of the Trump administration’s overseas economic policy are other clear examples of how tariffs, sanctions and the manipulation of interest rates can be weaponized.
However, in Turkey, the present situation offers a perfect illustration of how political power and economic power can collide, often with unpredictable outcomes.
President Erdoğan has seen his national currency the lira fall by around 40% of its market value this year and as a consequence has been calling for his people to sell dollars and euros and buy lira to help stabilize the situation.
This set of circumstances has come about in part due to Erdoğan’s personal influence over his country’s economy, which includes demands for lower interest rates and appointing his son-in-law as finance minister.
This mix of economic and political factors has meant that Turkey is now lurching towards yet another crisis, after several years of political upheavals that have seen a failed coup and a constitutional power grab by Erdoğan.
Any question as to whether Turkey’s current woes pose a threat to the world is underlined by its stock market having been cut in half this year. Indeed, the situation is similar to the currency crash in Argentina that needed an intervention from the International Monetary Fund (IMF).
However, it isn’t all just about market forces hitting currencies as trading between countries can also become highly political. Turkey is in an important strategic geographical position, bordering Iran, Iraq and Syria, and its basically pro-Western stance over the past decades has added some stability to a volatile region. As a full member of NATO, the country’s Incirlik air base plays an important role as a vital US forces Middle Eastern base.
Erdoğan said in an opinion piece in the New York Times that Washington “must give up the misguided notion that our relationship can be asymmetrical”. This was a veiled hint that Turkey is seriously considering shifting trading away from the dollar to other national currencies alongside Russia and China.
As an emerging market that has built up debt priced in dollars, Turkey is vulnerable to an upsurge in the US currency. With the Federal Reserve raising interest rates and economic strength in the US, the dollar has been performing very well against its rivals. This has led investors to move money from risky markets to buy safer American assets.
DataTrek Research’s Co-Founder Nick Colas explained: “That debt becomes ferociously expensive when your currency implodes the way the lira has.”
President Donald Trump is no stranger to using economic measures as international bargaining tools, as evidenced by the ongoing disputes with China and the seemingly recently settled trade discussions with the EU.
In August, Trump announced that tariffs on steel and aluminum imports from Turkey were to be doubled, and Erdoğan retaliated with a call to boycott US electronic goods. Although the term “trade war” has been bandied about perhaps a little too loosely recently, Erdoğan’s recent speeches to supporters have taken on the mantle of victim and aimed the finger of blame squarely at the US as the aggressor.
Is there a global threat?
The currency crisis in Argentina led to a $50bn bailout from the IMF and saw interest rates rise to a staggering 45%. What will happen if Turkey’s high levels of debt, looming inflation and continuing currency collapse go even further?
Brown Brothers Harriman’s Head of Emerging Market Currency Strategy Win Thin wrote to clients on Monday and stated: “The economy is in danger of a hard landing.”
“Market turmoil may eventually force him [Erdoğan] to go cap in hand to the IMF,” Thin said, adding that Turkey “is simply not prepared (or able) to go it alone”.
Investors are worried about a “contagion” that might see Turkey’s problems affecting other markets. For instance, some European banks could be vulnerable because of exposure to existing loans to Turkey that could take a hit. However, the bottom line is that Turkey’s economy is small in the greater scheme of things, so while Trump and Erdoğan play to their home crowds on the world stage, the IMF and the markets stand ready to rebalance the situation if needed.