Turkish financial and economical crisis

Turkish financial and economical crisis

Even though there have been conflicting thoughts that purported finance and economics as totally separate disciplines, however, scholarly factual arguments reveal that the two fields are strongly interrelated in the sense that finance and economics influences and informs each other. Therefore, the economics often associated with a vast point of focus, such as a country or a federal region market performance and the relevant public policies concerned. However, finance highlights the return and risk evaluation associated with investors and companies. Thus there exists a financial crisis when money supply is overtaken by money demand, which therefore leads to economic crisis. A phenomenon in which a country’s economy encounters an immediate downturn attributed to the financial crisis. Both financial and economic turmoil characterizes in recent years. In 2018, many countries witnessed monetary tightening worldwide, which mainly affected the emerging markets in which Turkey was one of the most affected.

Turkey has been one of the best performing and fast-paced economic growth rates globally, outshining countries such as India. Reports indicate that the country recorded a growth of 7.22% in its Gross Domestic Product (GDP), in the 2^nd quarter of the year 2018. However, finance analyst associates the growth in GDP to the massive debt of foreign currency. The 2008 global economic crisis, which was later succeeded by a downturn in the worldwide economy, had negative impacts on several countries’ economies. Therefore experts believe at that point in time, while central banks were releasing money to boost their respective economies, companies, and banks in Turkey were sourcing debts in foreign currency, mainly the United States dollar. External borrowing resulted in the domination of foreign currency in Turkey, which had a direct impact on specific industries such as construction in which payments are made in local currency.  Thus, in 2018 the US Dollar gain 31 percent in value compared to the Turkish Lira; therefore, Turkey was considered to be in a severe currency crisis. Its government’s spending was higher than the available revenue due to rapid expenditure and consumption, thus Turkey was regarded as having an imbalance of trade because it was buying more goods compared to the ones being sold.

Turkey’s dependence on external borrowing as the primary source of financing for both banks and corporate organizations led to its vulnerability to credit availability and changes in credit terms. Therefore Turkey’s financial burden increased due to the United States Federal Reserve’s decision to raise interest rates. Also, the investor confidence towards the country’s credit-worthiness drifted way low since private investors, both foreign and local, had a lot of doubt on various aspects such as booming construction industry and the related country’s monetary policies heading toward June 2018, general elections as Turkey lost investor confidence the demand for the local currency reduced which also led to depreciation of the currency value. Therefore the value of Turkey’s debt in local currency had a significant rise. The scenario discouraged a lot of investors since they had serious concerns relating to Turkey’s debt sustainability. Thus it further negatively influenced investor confidence; hence it also lowered Lira’s value.

On the 10^th of August of the year 2018, Trump, the United States of America president, further escalated the diplomatic row when he shared his sentiments via Twitter concerning the continuous depreciation of the Lira. President Trump went on and doubled the tariffs imposed on two main products aluminum and steel which were main Turkish Imports. His decision was based on the section 232 of the U.S. national security acted as another terrible blow to prospective and already established Turkish investors. The tweet resulted in a sudden further drop in Lira’s value. Furthermore, during that same year, the United States of America, through the leadership of President Trump, sanctioned two Turkish ministers based on allegations that they were directly involved in the detainment of an American religious leader. Thus the diplomatic row led to a rise in political tensions between the United States of America and Turkey, therefore this furthermore negatively affected investor confidence.

The political dimension also played a crucial role in the great financial and economic crisis in Turkey. Since President Erdogan ascended to power, his model of leadership was associated with the centralization of power and implementation of the populist policy. For that reason, his model of leadership never facilitated the growth of independent institutions that are mandated to check and provide solutions and regulation of several aspects ailing the economy. Thus failure by relevant institutions to provide sanity in the economy was one of the significant problems that were associated with Erdogan leadership.

The crisis in Turkey had a significant impact on the country’s economy because a more substantial majority of lending institutions faced a financial downturn. Since client organizations encountered challenges in settlement of their loans, mainly in foreign currencies caused by the loss of Lira’s value, which is the main currency involve in local transactions. Asset quality and the ration of the adequacy of the capital of local banks in Turkey were negatively affected by the crisis; therefore, it resulted in a loss of United States dollar value. Also, banks were forced to raise their interest rates aimed at mortgages, businesses, and loans to consumers. The economy was characterized by a reduction in the number of deposits and loan consumption in banks.

However, Turkish populistic leadership had positively impacted the construction industry. The development also led to unoccupied housing units done. The situation was more worsen with a 14 percent drop in the sales of mortgages, which was attributed to the rapid increase in home prices. Therefore the high inflation rate which is a consequence linked to the irresponsible government populistic policy.

2018, the Turkish economic and financial crisis also had an impact on the global economy. Thus the country’s economic ties with its trade partners in the international market weakened drastically. A perfect example being the weakening of the economic relations between Turkey and the United States. Thus the United States and Turkey had an imbalance in trade. Therefore the United States is among the top direct foreign investors and lenders in Turkey, It encountered a negative impact from the instability in the banking industry in the European Union, putting into account its strong ties with European Union.

Since the 2018 financial and economic crisis, Turkey is still facing some problems that were a result of the crisis, such as unemployment. With the currency crisis and its adverse effects such as inflation, unemployment standards at an alarming rate of 14.2 percent of the total population. The unemployment in the agricultural industry was relatively low compared to the other non-agricultural sectors such as construction that were profoundly affected by the crisis. In addition, the inflation rate in the country is still a challenge; therefore, consumer prices are always on the rise. Furthermore, to battle inflation, banks are continuously rising interest rates creating a situation that does not favor borrowing by companies and other business organizations.

In conclusion, the over-dependence of foreign borrowing by Turkey was attributed to its model of economy that heavily depended on a continuous flow of capital. The situation was further worsened by the Turkish government’s decision that made it easy for companies and local banks to borrow foreign currency. For that reason, foreign currency such as the United States dollar dominated the Turkish economy; hence it resulted in a severe currency crisis. Thus the 2018 currency crisis actively contributed to the financial and economic crisis witnessed in Turkey in the same year and spilled over to 2019. However, the Turkish government’s involvement in efforts to contain and manage the crisis proved its commitment through policymakers to resolve its economic challenges.