Turkey’s painful economic crisis grinds on as currency loses value
ARHAVI, Turkey — The terraced rows of tea plants climbing the hills above the Black Sea used to glint like money. Lately, they look like another casualty of Turkey’s long, grinding economic crisis.
Lipton, the multinational giant, recently scrapped production at one of its three tea-processing factories in the area. It has slashed purchases of tea from local farmers, depressing commerce in surrounding towns and villages.
“Everything is connected,” said the mayor of Arhavi, Vasfi Kurdoglu. “The Lipton factory closure is the worst thing that has happened. It has hit everyone — food stores, bakers, truck drivers who carry tea from here to Istanbul. We are going through a very hard time.”
More than a year after the onset of an economic calamity that has shaken the once-indomitable hold of Turkey’s strongman president, Recep Tayyip Erdogan, this nation of 80 million people remains stuck in uncomfortable proximity to crisis.
The latest indication came Monday as the Turkish currency, the lira, surrendered more than 3 percent of its value against the dollar in early trading in Asia before slightly recovering. The drop followed Erdogan’s abrupt dismissal of the nation’s central bank governor Saturday. Global investors absorbed the sacking as a signal that Erdogan is intent on recklessly lowering interest rates to accelerate economic growth, like a debt-saturated homeowner who resorts to a second mortgage rather than accepting a budget.
Turkey has avoided the meltdown that seemed possible last summer when the lira plunged precipitously, but safety is remote. The palpable threat of imminent collapse has given way to a sense of muddling through as the government unleashes credit to defer an inevitable reckoning. Meanwhile, anyone with money stashes it away in the face of gnawing fears, depriving the economy of vitality.
Turkey’s currency remains battered, while its foreign debts remain vast. Inflation and joblessness are alarmingly high. Economic growth is minimal and anxiety considerable amid the sense that more trouble lies ahead.
This is playing out as Turkey contends with political uncertainty after the shocking rebuke of Erdogan’s ruling party in the recent Istanbul mayoral election. A president with a reputation for ignoring unpalatable facts, or thrashing those who wield them, now appears at the mercy of forces he cannot command: international markets.
For Erdogan, all available choices entail peril.
Most economists maintain that he must accept interest rates above the now-stultifying level of 24 percent to dissuade investors from abandoning Turkey. That should prevent the lira from falling further, limiting inflation. But it would also deprive businesses of capital, yielding bankruptcy and joblessness, while constraining economic growth.
Erdogan has consistently opted for growth at any cost. He has famously
“I don’t think companies will be able to pay back their debts. It may spill over to the local banking system. They are the ones who are going to be on the hook for the bad loans.” Selva Demiralp, an economist who previously worked at the Federal Reserve Bank in Washington and now teaches at Koc University in Istanbul
argued that high interest rates cause inflation, which is like blaming abstinence for a hangover. He fired the central bank chief precisely because he refused to lower rates, according to reports in Turkey.
All signs now point to Erdogan forcing interest rates lower, while pumping credit to Turkish businesses and households. That should spur spending and economic growth, but at the cost of remaining faith in the currency, yielding more inflation and bank losses that risk eventually exploding into a full-blown crisis.
“It’s all coming apart,” said Fadi Hakura, a Turkey expert at Chatham House, a research institution in London. “The government is so wedded to this consumption model this will ultimately lead to an economic breakdown.”
During his 16 years in power, Erdogan has proved a maestro of economic growth, using influence over the financial apparatus to steer credit to his cronies in the construction industry. They have erected monuments in his honor — a new Istanbul airport, high-rise office towers and an ever-expanding trove of shopping malls and resorts.
But as international investors have taken note of the mounting debt produced by this development, they have fled. Over the last two years, the lira has surrendered 40 percent of its value against the American dollar. The drop has lifted the prices of imported goods, from fuel to fertilizer, yielding inflation running at 19 percent.
From corporate offices in Istanbul to open-air markets across the nation, frustration over rising prices has gained force, reinforcing thrift and diminishing national fortunes.
“If people were going to buy 2 kilograms of fruit, now they buy 1,” said Fuat Kar, as he tended to his produce stand at a market in the blue-collar Istanbul neighborhood of Silahtaraga.
The price for his cherries has soared from 6 lira ($1.05) a kilogram to 15, as farmers charge him more. The cost he bears for plastic pallets and paper bags has risen.
As his income falls, he is spreading the pain by eating out less.
The biggest immediate threat to the economy remains loans in foreign currency.
After the 2008 financial crisis, as the U.S. central bank dropped interest rates to zero to spur revival, Turkish banks took advantage of free money by borrowing dollars. They lent greenbacks to Turkish businesses eager for an alternative to the lira’s high borrowing costs.
Such transactions were attractive, because the lira was then appreciating and the Turkish economy was rapidly expanding. But in recent years, as the lira has fallen, companies with revenues in lira and debts in dollars have seen their burdens expand.
Turkey’s medium- and longterm foreign currency debts exceeded $328 billion as of the end of 2018, according to official data, with private companies responsible for about two-thirds. Private companies confronted a further $138 billion in foreign exchange debt due in the next year. Given that Turkey’s overall economic production was about $766 billion last year, these numbers were disturbing.
“I don’t think companies will be able to pay back their debts,” said Selva Demiralp, an economist who previously worked at the Federal Reserve Bank in Washington and now teaches at Koc University in Istanbul. “It may spill over to the local banking system. They are the ones who are going to be on the hook for the bad loans.”
Some say the government has room to help companies in trouble. Officially, government debt last year amounted to a manageable 30 percent of annual economic output.
But Turkey’s financial workings are opaque and vulnerable to political manipulation. Erdogan has tapped state-owned banks to finance favored projects. Partnerships between the state and private companies have kept debts off government ledgers.
“These major projects, when they fail, it’s going to be the government that is going to have to bail them out,” said Hakura, the Chatham House expert. “The public debt numbers are a mirage.”