HH Rough Seas Ahead For The Turkish Economy
For several years, the Turkish economy has managed to keep its balance despite teetering on the brink of major problems. In 2013, the notorious "taper tantrum" exposed Turkey as one of the Fragile Five countries that would be most affected by an expected tightening in U.S. monetary policy, and the outlook for the country appeared bleak. But Turkey has broadly defied its naysayers. In the years since, its gross domestic product has grown steadily, inflation has been manageable and it has had no major debt defaults, all despite the fear that U.S. interest rate increases would actually come to fruition. Favorable circumstances have helped the Turkish economy defy the gloomy expectations — particularly the 2014-15 drop in global oil prices. But as oil prices stabilize and other positive factors fade away, Turkey looks likely to suffer greater economic hardship over the coming months.
A ferry steams past the Hagia Sofia, a major tourist attraction in Istanbul. Tourism, a prime source of foreign currency in Turkey, has suffered as the result of terrorist attacks this year. (CHRIS MCGRATH/Getty Images)
The origins of Turkey's economic fragility stem from a period of rapid growth in the 2000s. Unlike other high-growth countries in the period such as China, which focused its economy on manufacturing and exporting products to the global market, or Russia, which grew off the back of global demand for its commodities, Turkey's boom was largely based on domestic consumption and investment. While Turkey's export capabilities did grow, notably in the white goods sector (washing machines and other electrical appliances), its growth rested overwhelmingly on consumption and on a thriving construction sector. As a result, Turkish growth came with a current account deficit; this meant that speculative foreign capital coming into the country made it possible for Turkey to bring in more products from abroad than it was exporting. That type of growth is sustainable as long as foreign investors believe they can achieve a better return for their money in Turkey than somewhere else; when they lose faith, the ensuing loss of liquidity can cause sizable problems.
In Turkey's case, the repayment of foreign currency debt could emerge as a particular problem. It is an issue that has recurred around the world many times: During good times, residents and companies in a high-growth country take out loans in a foreign currency (usually in dollars), lured by low interest rates offered by investors looking to share in the growth. Then when a downturn arrives, the national currency weakens, making it much harder for debtors receiving earnings and wages in the local currency to repay the dollar-denominated debt. These effects can be tempered if foreign investors are willing to roll over loans or make new ones. But this is reliant on continuous, external goodwill.