Posted on January 3, 2019 by PINC Insurance

Turkey has always been a big part of the world’s history and continues to be so till date. The bridge between Asia and Europe, it is mainly known as a tourist destination. But Turkey has been making the news for the wrong reasons. Its economy is in dire crisis. Turkish Lira is down 40% against the US dollar this year. To counter this situation the country’s central bank increased the liquidity of Turkish banks by loosening their reserve requirements which helped to raise the Turkish lira by 6% in the market.

Faith over Facts

According to experts, a couple of policy errors have led to Turkey’s current crisis. Unless President Tayyip Erdogan makes a major U-turn by ordering an increase in central bank interest rates, the Lira and Turkey’s economy are heading for more trouble. That is least likely to happen since the president holds a belief that high interest rates are ‘evil’.

Erdogan has said many irrational things in the past which makes this situation look worse than it already is. At a meeting in Chatham House, London, Erdogan told attendees to “please learn” that low interest rates deliver low inflation. He believes that when people fall into difficulties because of monetary policies, they are going to hold him accountable.

Thus he believes the government has to give off a image of a president who is influential on monetary policies.

Heading Towards Bigger Problems

Turkey could be heading towards a full-fledged balance-of-payments crisis. Simply put, Turkey’s currency becomes so devalued it becomes unable to pay its debts or buy services from abroad. Turkey’s current crisis is worse than Argentina’s hyperinflation that crippled the country earlier this year. It is also worse than the recession in Turkey started by the 2001 deficit payment crisis, according to Bank Of America-Merril Lynch’s Ferhan Salman. Gross external debt has reached US$ 466bn, surpassing the levels of 2001 financial crisis. External debt rollover needs in the next 12 months are also high, around US$ 180bn-about 22% of GDP.”

Short-Term Strength

The government recently posted a healthy current account surplus. This has led to the short-term strengthening of the Lira over the first week of October. However socio-political tensions between the USA and Turkey could push the Lira down even further. There is also a lot of uncertainty regarding the central banks’ position and ability to handle the growing bad debts.

Until further measures are taken, the Lira could see more value lost this year.