ROOM FOR GROWTH
he fallout of the lira’s sharp decline in August 2018 was far-reaching. It impacted consumption, investment, and inflation and sent the economy into an official recession when 2018’s final quarter growth figures were released.
To contain inflation, which shot above 25% in October 2018, the central bank raised its benchmark interest rate to 24%. While the move dampened demand for credit and contributed to an investment slowdown, it surpassed expectations in reducing inflation. The positive effects prompted a downward revision of year-end inflation expectations to around 12%.
With inflation steadily falling yet interest rates remaining high, calls for a changing of guard at the Central Bank began emerging from the government. Those calls were answered in early July, when Murat Uysal was appointed the new governor of the central bank. He promptly set the bank on a course of lower interest rates, slashing the benchmark rate by 10% by October.
The central bank’s moves have coincided with a global appetite for expansionary monetary policy. This environment has further reinforced the timing of the rate cuts, as global investors have turned to emerging market currencies like the lira
Tin search of returns, thus lessening the downward currency effects often brought on by low domestic interest rates.
Turkey’s economic slowdown, caused by factors mostly exogenous to the global economy, has come during a time of broad trade uncertainty. A trend of protectionist economic policies, the US-China trade war, and Brexit uncertainty caused the World Trade Organization to lower its forecast for world trade in merchandise from 2.6% to 1.2% for the year. Such global uncertainty has a high risk of exacerbating Turkey’s economic woes.
While Turkish exports remained strong—in part due to the lira’s weakness—imports dropped sharply due to weakened domestic demand. In the first 10 months of 2019, exports totaled USD148.84 billion, a 2.1% rise from the same period last year, while imports dropped to USD172.71 billion, a 13.2% fall.
As with most countries, Turkey is not dictating the reshaping of global trade norms, though it is heavily impacted by the result. In the meantime, it is intent on diversifying the countries on which it relies for trade, investment, and diplomatic cooperation. While this path has not been without controversy, it may prove key to navigating an increasingly complicated world. ✖