The Turkish emerging market time bomb

Aug 16,2018 – JORDAN TIMES – Jim O’Neill

LONDON — Turkey’s falling currency and deteriorating financial conditions lend credence, at least for some people, to the notion that “a crisis is a terrible thing to waste”. I suspect that many Western policymakers, in particular, are not entirely unhappy about Turkey’s plight.

To veteran economic observers, Turkey’s troubles are almost a textbook case of an emerging-market flop. It is August, after all, and back in the 1990s, one could barely go a single year without some kind of financial crisis striking in the dog days of summer.

But more to the point, Turkey has a large, persistent current-account deficit and a belligerent leader who does not realise or refuses to acknowledge, that his populist economic policies are unsustainable. Moreover, Turkey has become increasingly dependent on overseas investors, and probably some wealthy domestic investors, too.

Given these slowly gestating factors, markets have long assumed that Turkey was headed for a currency crisis. In fact, such worries were widespread as far back as the fall of 2013, when I was in Istanbul interviewing business and financial leaders for a BBC Radio series on emerging economies. At that time, markets were beginning to fear that monetary-policy normalisation and an end to quantitative easing in the United States would have dire consequences globally. The Turkish lira has been flirting with disaster ever since.

Now that the crisis has finally come to pass, it is Turkey’s population that will bear the brunt of it. The country must drastically tighten its domestic monetary policy, curtail foreign borrowing and prepare for the likelihood of a full-blown economic recession, during which time domestic saving will slowly have to be rebuilt.

Turkish President Recep Tayyip Erdogan’s leadership will both complicate matters and give Turkey some leverage. Erdogan has steadily been seizing constitutional powers, reducing those of the parliament, and undercutting the independence of monetary and fiscal policymaking. And to top it off, he seems to be revelling in an escalating feud with US President Donald Trump’s administration over Turkey’s imprisonment of an American pastor and purchase of a Russian S-400 missile-defence system.

This is a dangerous brew for the leader of an emerging economy to imbibe, particularly when the United States itself has embarked on a Ronald Reagan-style fiscal expansion that has pushed the US Federal Reserve to raise interest rates faster than it would have otherwise. Given the unlikelihood of some external source of funding emerging, Erdogan will eventually have to back down on some of his unorthodox policies. My guess is that we will see a return to a more conventional monetary policy and possibly a new fiscal-policy framework.

As for Turkey’s leverage in the current crisis, it is worth remembering that the country has a large and youthful population, and thus the potential to grow into a much larger economy in the future. It also enjoys a privileged geographic position at the crossroads of Europe, the Middle East and Central Asia, which means that many major players have a stake in ensuring its stability. Indeed, many Europeans still hold out hope that Turkey will embrace Western-style capitalism, despite the damage that Erdogan has done to the country’s European Union accession bid.

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http://jordantimes.com/opinion/jim-oneill/turkish-emerging-market-time-bomb

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