Up to recently, Turkey was a rising economic power with close financial ties with the European Union. This rosy prognosis is no longer valid.
The crux of the current crisis is that Turkey’s economy has major structural and financial problems– private-sector debt is extremely high and inflation was running at 17.9% in August. Turkey’s unemployment rate is also quite steep at 9.7% in May.
Turkey’s currency, the lira, has lost around half its value against the U.S. dollar over the past year, and most of that is since the start of this year. The country’s central bank was forced to raise its benchmark rate by a hefty 625 basis points on September 14. The lira immediately rallied about 3% against the U.S. dollar following the large interest rate hike.
Ironically the financial structure of the Turkish public sector is reasonably strong since government debt as a percent of GDP is only 28%, still much lower than the debt indices of most European countries. The key financial problem, however, lies in private-sector debt, which could bring down some Turkish firms.
To make matters worse, Turkey has a huge refugee problem because of the Syrian war, and at the same time, Turkey has been politically quarreling with the United States.
It is not yet clear whether recent statements in support of Turkey by European leaders together with measures undertaken by Turkey’s central bank will stop the lira’s hemorrhage.
What is certain is that the Turkish economic crisis is multifaceted, and with respect to the U.S. quarrel, a resolution is not likely anytime soon.
Exacerbation of Turkey’s current economic crisis will not only affect Turkey but also could reverberate globally.
