Turkey becomes the riskiest economy in the world after Erdogan re-election

During the past couple of months, talks about the global economy have mainly focused on the relations between the U.S. and its former allies, with tariff-to-tariff trade wars and rising oil prices being the main topics of discussion. While that conversation must be continued in order to have a rational response to the Trump administration’s abusive and manic approach to foreign policy, let’s take our focus outside from that for once.

We need to acknowledge the situation in Turkey. The country has recently re-elected its president Recep Tayyip Erdogan, who has been at the forefront of Turkey’s political actions for fifteen years. After being the country’s prime minister for eleven, he went forward to become the president and brought with him a controversial approach to his position.

He has continuously argued for a president-focused government, saying that by giving a country’s president most administrative powers, it is only him who could be held accountable if the nation were to fail in its projects. His new administration will start with massive changes to his set of powers. From now on, he will have complete executive powers, eliminate the presence of a prime minister and have even more control over the country’s Central Bank, which plays a huge part in his country’s economy.

During the months leading up to his reelection, Turkey’s currency has been consistently plummeting, having a 20% drop in value this year. Although Erdogan attempted to mask this as the fault of other countries’ intervention in Turkey, the changes have been mainly attributed to concerns from global investors. The Turkish lira will likely continue its spiraling down, since its value also dropped after Erdogan gave his son-in-law the charge of the economic chief.

This situation is only worsened by the infrastructure projects that Erdogan has attempted to pull off. There has currently been construction for a new Istanbul airport, which will cost approximately 12$ billion and has the objective of becoming the busiest airport in the world. The project is being funded by public money, which is delivered to businesses that work closely with Erdogan. This is an extremely risky project due to the potential loss it could mean for the Turkish people if the airport were to be overly large and not used to its full capacity, which could definitely happen. The airport has also removed several hundreds of families who were living in the land where it will be built.

Such a series of failures may seem strange, since Turkey is considered to be one of the fastest growing economies in the world. However, this has only been accomplished by continuous and unhealthy habit of borrowing in foreign currency, which is problematic due to the lira’s current state.  It is believed that private sector Turkish companies owed over $245 billion in debt, which is over a third of the country’s overall economy.

This leaves Turkey in a very complicated situation, since banks are every time more hesitant to borrow money to them and have very few ways to move forward. While lifting interest rates even more could make for a compelling case for Turkey, it would stop the country’s economic growth and turn its evolution the other way around. Turkey could still have economic growth, but at the expense of an insanely high inflation and even less value to their currency. The country could also reach out to the International Monetary Fund and beg for help, but that would cause for high and problematic spending cuts.

Within this context, Turkish companies have struggled to keep themselves from losing funds. Since many borrowed money in national currency years ago, most of them are now facing the struggle of having insufficient funds to move forward with the projects they had in mind, since the lira’s value has been plummeting for a couple of years now. Many other companies learned the lesson from their fellow institutions and started borrowing money in foreign currency, which is an immediate benefit for them but a problem for their national economy.

In the end, the situation in Turkey is still very uncertain and, due to Erdogan’s new administrative powers, sadly unpredictable. Repercussions for the president’s actions are already being felt and the population is every time more concerned about the economy. In the best case scenario, their airport project will work and re-stabilize the country’s income and repay it’s debts. However, many economists and financial experts have stated that Turkey currently has many signs of a “failed state”, and that it might cause for a complete “disintegration” of their presence in the global market.

Featured Image via President of Russia