In five short years, Turkey has experienced a whirlwind of political events — from popular upsurges to changes in the political system, war within and outside the country, and bombing attacks. In fact, the nation has been under an official state of emergency since a failed coup in July 2016. Complicating matters, Turkey’s economy is on very shaky ground, just as the country is bracing itself for general elections which could prove pivotal in the long-term.
As it is, Turkey is on the verge of a currency crisis. The lira is down 24% against the U.S. dollar year-to-date driven by a confluence of factors. These include Turkey’s weak economic fundamentals, aggravated by double-digit inflation, reliance on foreign funding in an environment where rising U.S. interest rates are making dollar-denominated debt more expensive, and the fact that Turkey’s Central Bank and President fundamentally disagree on Turkish interest rate policy. Rising oil prices have also weighed on the lira, as Turkey is a net oil importer and must sell liras to buy dollars to pay for its oil.
Moreover, the country’s economic model appears to be unsustainable. While Turkey has experienced high nominal GDP growth for several years (7.4% in 2017), that growth has been heavily financed by dollar-denominated investment. Few economists expect a decrease in the current account deficit, which is on trend to exceed 6% of GDP. Even consumer and business sentiment have turned pessimistic about inflation, wages, employment growth, and investment spending . . .