The Turkish financial crisis of 2018

The Turkish financial crisis of 2018

The Turkish financial crisis of August 2018 is a currency crisis with international repercussions due to financial contagion.  Over this crisis the Turkish economy has been caught up in a perfect storm. The inflation was high (almost 18%) and the deficit continued to deteriorate (6.5% of Gross domestic product “GDP”), also the stock market has also fallen 17%.

The lira started to fall sharply on 10 August, as the diplomatic spat between the US and Turkey escalated .The Turkish lira fell 25% against the US dollar.

Moreover, Turkey’s economic situation is especially fragile. Given the complexity and nuance of its debt markets, a variety of reports suggest Turkey holds in excess of $200 billion in dollar-denominated debt. This compares with $851.1 billion in gross domestic product at the end of 2017 (according to the World Bank). As the dollar strengthens against the lira, it becomes more expensive for Turkish corporations and the government to convert lira into dollars in order to service the debt, and an inability to service interest payments would no doubt weigh on global sentiment and increase capital flight.

Causes:

A combination of factors, has led to the country sliding into a financial crisis:

• Turkey’s current account balance deficit is among the biggest in emerging markets :

Turkey has led the pack of countries that maintain a high dollar-denominated debt burden also Turkey’s annual external needs, including both its account deficit and maturing debt, come to around $218 billion, according to the Institute of International Finance. That number representing 28% of GDP. More than half of that debt is dollar-denominated

• Turkey’s economic and political climate :

Turkey’s central bank simplification its monetary policy with the announcement of another interest rate hike. From 8% at 16.5%

The Central Bank of the Republic of Turkey has intervened at numerous points, with little success, to stave off the lira’s drop and stabilize inflation.

But for Turkey, the euro-dollar exchange rates is also of importance, given Ankara’s trade with the European Union, which is accounted for in U.S. dollars, as well as Turkey’s imports, which are also accounted for in dollars. That means that if the euro is weaker Turkey gets paid less for its exports and its import are more expensive. The euro has dropped 5.2% against the dollar in the beginning of 2018

. Diplomatic relations

Making matters worse are Turkey’s diplomatic and trade spats with the U.S. Relations between Ankara and Washington have suffered on the back of the detention of U.S. evangelical pastor Andrew Brunson, with Turkey dismissing calls for his release.

The U.S has introduced sanctions over the issue, on top of the existing trade tariffs that already affected Turkey, in which USA has approved the doubling of tariffs on Turkish steel and aluminum.

Consequences:

• Economic Implications for Turkey:

Turkey’s currency crisis could create a wave of defaults across Turkey’s banks and corporations, whose debts to foreign creditors have nearly doubled since 2010

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