Financial and Economic Crisis in Turkey

Financial and Economic Crisis in Turkey

Turkey received a lot of accolades for exceptional economic performance. It was heralded as one of the fasted growing economies in Asia following China. There were massive investments, and the standard of living significantly improved. However, in the last decade, companies in turkey borrowed considerably, with 60% of the debt being external in terms of dollars and euros. This was risky for the companies because they make their earnings in liras. This meant that if the lira lost value with respect to other currencies, it becomes challenging for the companies to steal the debts (Ercan, 2019). While the credit boom was taking place in Turkey, there were lose monetary policies that allowed the economy to grow steadily but failed to keep inflation in check. When inflation financially occurred in 2018, there was a crisis in the economy as companies struggled to pay loans due to shrinking earnings. This essay will focus on the current financial and economic crisis in turkey.

Causes of Turkey’s Financial Crisis

Turkey’s economy grew by just 2.4 percent in 2018 as compared to 7.4 for 2012.  The crisis in turkey began with a row with the USA last summer. There was a bitter dispute last year between Donald Trump over an American pastor who was jailed. This resulted in a severe sell-off of the lira that is likely to reverberate throughout the year. The lira nosedived to all times low against the dollar. These effects are expected that it will continue to cause negative growth. The decision to depreciate the currency put a lot of pressure on the corporate sector that had a lot of debt that was in terms of foreign currency.  The turkey’s central bank hiked the interest rate to 24%, a move that was meant to reassure investors as well as help in stabilizing the currency. However, this move sent shockwaves in the entire economy, which resulted in a decline in the banking rate of banks and a drop in consumer spending and business confidence (Türkmen-Ceylan, 2019).

  Turkey is blaming the effect on foreign powers who staged a speculative attack on the economy (Pitel, 2019).  the crisis was also contributed by a stimulus of the government that the government aim at boosting the performance of the economy after the attempt of a coup in 2016. Thus caused the economy to overheat, which left the economy vulnerable to an abrupt shift of investors’ sentiments. Another reason why turkey found herself in this situation is that the country fueled the expansion of its economy using foreign currency debt (Akcay & Güngen, 2019).  When countries around the world were investing in their economies to recover from the economic crisis, the companies and banks in turkey were taking huge leans that were denominated in USA dollars. This borrowing had a significant impact on fueling consumption and spending, which made the turkey, which made turkey run a deficit in both fiscal and current accounts.  The former is likely to occur when the government spends more than the review it gets, while the latter implies that the government is buying more goods than it is selling to countries.   This has resulted in a massive debit that above 50% of the GDP (YenNee_Lee, 2018).

Effect of The Economy

One of the impacts of the crisis in turkey is that the lenders were forced to restructure because companies were not able to service their debts, which were in dollars and euros.  Most of the companies lost their earning as a result of the depreciation of the Turkish lira. Financial institutions that have always dominated the stock markets in the country, accounting for almost half of its value, decreased to nearly a third of the values of its stock. Most of the companies that had debts were flocking to the lenders seeking the reorganization for their obligations (Goodman, 2019).  The banks were faced with a more significant problem of capital adequacy ratio that kept deteriorating throughout the crisis.

Another impact is that the economy is lacking in vitality because people are dishing away the money they have because of fears of further deprecation. There is a very minimal investment since the lira is losing significantly to other currencies (Ercan, 2019). For example, the lira lost 40 percent of its value to the US dollar since 2018. There has been a growing anxiety as people forecast more troubles ahead.  This has made the economy the economy to stagnate significantly. This is the effect of rising inflation in the country. As a result, the rate of employment has increased as companies struggle to remain afloat amidst the loss they made as a result of the depreciation of the lira (Koc & Ersoy, 2018).  In such cases, companies take measures such as downsizing so that they can increase the amount they save so that they can meet their debt obligation (Goodman, 2019). The problem of unemployment is likely to become worse because the investors are losing their interest in the economy, and this starts leaving.

Global Impact

Turkish economic crisis has not had a global impact. However, there are fears that this crisis may spill over to Eurozone. Turkish companies have borrowed significantly from the banks in spay na and Italy, and its inability to pay the money may have an impact on those institutions.  Furthermore, the tension between Washington and Ankara may continue to deteriorate, and this may result in the crisis becoming more severe (Deutsche Welle, 2018). This likely exposure of the crisis to the Eurozone has resulted in the European central bank looking at ways in which it can help the banks that have to lend money to companies in turkey. However, their little expectation that inflation in Turkey will have a less significant impact on the GDP of the Eurozone. It is estimated that even if the exports of the EU to turkey would fall by maybe 20 %, this would only subtract about 0.1 % of the Eurozone economy. The economy of turkey of about $ 866 billion accounts for just 6.5% of the GDP of the Eurozone (Deutsche Welle, 2018). Even though there was an attempted coup in 2016, where the economy of turkey slumped, there was an impact on the Eurozone. Economists note that the impact that the banks in the EU will experience will be minimal, and such banks will have sufficient tools that they will use to evade the damage. Therefore, a credit crunch in any part of the Eurozone is unlikely and not foreseeable in the short term.

Fiscal Measures Implemented

In response to the financial crisis, the finance minister in turkey has responded by lowering the targets for the economic growth of the country. This would be followed by slashing the public expenditure by nearly $ 10bn as the country tries to get away from the crisis. For 2019, the minister cut the growth rate forecaster from 5.5% to 2.3% in 2019 (The Irish Times, 2018).  The government also promised to cut the showpiece infrastructure that took a significant part of government spending. The reduction in government spending will be vital in reducing the budget deficit, which results in external borrowing. The reduced government spending will essential in reducing the supply of money in the economy, which will help to tame inflation. However, there are calls that there is a need to look at a way to raise revenue. The government is also implementing private, public partnerships at the recommendation of the IMF and also visiting the social insurance schemes.

Problems That Still Exist

There are a few problems that turkey is stills facing.  One of them is the reduction in late of investment in the economy and the rising levels of inflation. As a result of the persistent microeconomic vulnerabilities, there has been a collapse of investment. Even though disinflation has started, the rate of inflation is still high averaging for 18% in the three quarters of 2019. The household is also hurting as a result of the increasing rate of unemployment and the declining purchasing power. The poor workers are the ones how are most affected by job loss. In 2019, Turkey lost 840 thousand jobs as a result of the crisis. The corporate sectors are stills weighed down by significant debt burden, which were borrowed in euros and dollars. Banks are also dealing with their balance assets as a result of the loss incurred as a result of devaluation (World Bank, 2019).

Conclusion

Turkey has experienced a financial and economic crisis since 2018.  The problem resulted from the reliance on financing from other countries that were borrowed in dollars and euros.  However, the depreciation of the currency resulted in a loss to the business, which them unable to settle their loans and sustain employment.  As a result, there has been massive unemployment and decreasing consumer expenditure.  The conflict with the united states has exacerbated the problem. The impact of the problem on the global arena is minimal.  The Eurozone is likely to be affected because substantial financing has been procured from there, but the banks in the region are prepared to handle the situation.   This has reduced the expenditure so that it can reduce the flow of money in the economy, thus reducing inflation.   There are stills challenges that stills exist, such as unemployment, low investment, and the corporate sector still being weighed down by the debts.

References

Akcay, Ü., & Güngen, A. R. (2019). The making of Turkey’s 2018-2019 economic crisis (No. 120/2019). Working Paper. https://www.econstor.eu/bitstream/10419/200182/1/1667890263.pdf

Deutsche Welle. (2018, August 10). Will Turkey’s economic woes reach Europe?: DW: 10.08.2018. Retrieved March 13, 2020, from https://www.dw.com/en/will-turkeys-economic-woes-reach-europe/a-45032113

Fanak. (2019, September 3). The Cost of Control: President Erdogan and Turkey’s Economic Crisis. Retrieved March 13, 2020, from https://fanack.com/turkey/economy/turkeys-economic-crisis/?gclid=Cj0KCQjwu6fzBRC6ARIsAJUwa2RY39bpWKyzvoK57N5T93nvhcva93hyu6Ddse5cBqXM7EtoKA0IYPkaAoC6EALw_wcB

Goodman, P. S. (2019, July 8). Turkey’s Long, Painful Economic Crisis Grinds On. Retrieved March 13, 2020, from https://www.nytimes.com/2019/07/08/business/turkey-economy-crisis.html

Koc, C., & Ersoy, E. (2018, December 9). Retrieved March 13, 2020, from https://www.bloomberg.com/news/features/2018-12-09/how-turkey-created-a-debt-crisis

Pitel, L. (2019, March 11). Turkey falls into recession as lira crisis takes a long-lasting toll. Retrieved March 13, 2020, from https://www.ft.com/content/92818e7c-43c6-11e9-b168-96a37d002cd3

The Irish Times. (2018, September 20). Turkey to slash public spending over the currency crisis. Retrieved March 13, 2020, from https://www.irishtimes.com/business/economy/turkey-to-slash-public-spending-over-currency-crisis-1.3635804

World Bank. (2019, November 5). Turkey Economic Monitor: Charting a New Course. Retrieved March 13, 2020, from https://www.worldbank.org/en/country/turkey/publication/economic-monitor

YenNee_Lee. (2018, August 13). What went wrong for Turkey? Its economy is ‘in the midst of a perfect storm.’ Retrieved March 13, 2020, from https://www.cnbc.com/2018/08/13/turkey-crisis-economy-faces-weak-lira-inflation-debt-and-tariffs.html

Türkmen-Ceylan, F. B. (2019). Economic crisis and consumption: an almost ideal demand system estimation for Turkey with time-varying parameters. Development Studies Research, 6(1), 13-29.https://doi.org/10.1080/21665095.2019.1566012

Ercan, Ö. Z. E. N. (2019). Coping with the exceptional economic problems in Turkey: a field survey on SMEs. Timisoara Journal of Economics and Business, 12(2), 109-126. https:// DOI: https://doi.org/10.2478/tjeb-2019-0006