Political and Financial Risks Facing Turkey’s Economy

While Turkey’s economy seems to have successfully recovered from a recession, certain risks may threaten its economic health moving forward. The country faced three straight quarters of recession through quarter two 2019, precipitated by a roughly 30% devaluation of the lira. On December 2, the government’s Turkish Statistical Institute (TUIK) announced that the country had grown by 0.9% in the third quarter of 2019, compared to the same quarter last year. In that quarter, the agricultural sector posted a growth of 3.8% and drove growth for the overall economy. Meanwhile, while the construction sector had previously provided an engine for the country’s economic expansion, the sector shrank by 7.8% in the third quarter. On December 12th the central bank cut interest rates for the fourth time this year to 12%. Given this interest rate, the real policy rate is now roughly 1.3%, which stands above similar rates in China and Brazil but lower than rates in other developing countries, such as South Africa. The government aims to reach 5% GDP growth in 2020, but the economy faces various risks that may render such numbers unattainable. The country faces significant political and financial risks arising from both domestic and international factors.

On the domestic front, the president, Recep Tayyip Erdogan, has threatened the central bank’s independence and autonomy. Over the summer, Erdogan promoted a new Central Bank governor who has proven more amenable to his plans to initiate deep rate cuts to stimulate the economy. Some worry that the most recent cut on December 12th may have been a step too far and may lead to an increase in inflation. On the international front, the country faces potential economic sanctions that may put a dent on growth. The EU placed sanctions on Turkey in November over its hydrocarbon exploration activities in the seas around Cyprus, and Turkey shows no sign of ceasing these activities. Both houses of the US Congress have initiated bills to sanction Turkey over the purchase of the S-400 system from Russia. No bill has passed yet, but opposition to the purchase seems to be gaining bipartisan momentum. One such bill, “Promoting American National Security and Preventing the Resurgence of ISIS Act of 2019,” gained the support of the Senate Foreign Relations Committee on December 11th and will next proceed to a vote in the full Senate. President Erdogan has affirmed that Turkey would respond to the imposition of sanctions by closing the US military’s base at Incirlik, which has stored NATO nuclear weapons since the Cold War. Thus, current disagreements may metastasize and lead to conflicts in other areas of US-Turkey relations.

The economy faces a series of financial risks, some of which arise from the political risks mentioned above. The lira fell steeply on December 16, to a two-month low, after Erdogan made the aforementioned comments related to the Incirlik military base. If the sanctions measure is passed, the lira could face even stronger downward pressure. This would render foreign debts, which are often denominated in dollars, much more difficult to service. By December 2018, Turkey’s medium and long-term foreign debts stood at roughly $328 billion, nearly half of the country’s GDP of $766 billion that year. Such burdens may lead to instability in the Turkish banking system and for the lira in the years ahead.

The Turkish government has set a target of 5% growth for the year 2020. Ultimately, challenges both domestic and international may make this goal unattainable. Most notably, the United States’ actions, specifically whether it imposes sanctions on the country, may determine Turkey’s ongoing economic health and whether investment there creates more risks than opportunities.

About the Author

Dwight Lindquist

Dwight Lindquist earned his MA in International Studies from the Johns Hopkins University and has studied extensively at the Hopkins-Nanjing Center in China. Dwight is fluent in English and Mandarin, previously earning a Certificate from the East China Normal University in Shanghai.

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