Written by By Lisa Beyer, CNN
Turkey’s economy is in a precarious position. On Aug. 2, President Recep Tayyip Erdogan announced a state of emergency in the wake of a violent coup attempt in July in which more than 240 people died.
By decree, the measure halted a banking probe into a network of companies linked to the president.
Today, the main TMSI stock index closed at a 16-year low, shedding more than 5%, mainly due to Turkey’s worsening economic situation, sparked in part by Erdogan’s bank crackdown and a steep decline in the lira.
In an interview with CNN Turk, Haluk Fatih, an employee at car dealerships in Istanbul, voiced widespread anxiety.
“There are no jobs, salaries are not going up, and the cost of living is up,” Fatih said. “We can barely make ends meet.”
In light of the deadly coup attempt, observers are comparing the Turkish economy to a fated dream.
“The economy is being pulled by the margin of hope and its kneejerk reaction is always to expand at every turn, which leads to high inflation,” said Mehmet Ali Birand, chairman of Istanbul-based investment and brokerage company Emin Gabis. “So, all these forces combine: Financialization, stock fraud, a zero-interest-rate environment.”
To affect a major economic turnaround, one would expect that Turkey would become a major player in international markets, but it’s not a member of either the European Union or the North Atlantic Treaty Organization.
Instead, Turkey continues to rely on other countries to provide credit in exchange for high rates of return. “Turkey is very dependent on foreign capital to invest there, but how do you manage that dynamic if you have a presidential system in which the head of state is also the prime minister and the president is also the commander in chief? How do you manage it?” Birand asked.
It’s not easy to know exactly how the country is doing. Whatever is happening in the banking system, it’s not part of the public domain.
“For us, each day is a new life change and a new risk,” said Aytac Kemal, an employee at a roofing company in Istanbul.
Turkish assets dive
In the summer of 2016, investors’ confidence in the Turkish economy started to sizzle. Ankara had expanded economic ties with Russia, particularly after Turkish jets shot down a Russian fighter jet. And in May, U.S. President Donald Trump imposed sanctions on Turkey, including a cutoff of sales of U.S. goods and the re-imposition of sanctions on Iranian oil.
“Oil prices went up, and the Turkish lira collapsed,” said Ali Aydogan, founder of Istanbul-based private firm Azavilco.
On the day of Trump’s sanctions, Aydogan’s company had scheduled a fixed exchange rate for Turkish currency. The Fed raised interest rates, and the lira’s fall accelerated. The company didn’t have any dollars, as trading was closed.
Today, both the lira and the benchmark stock index are down more than 25% against the dollar, from 9.11 lira to 18.45 lira on August 30, 2018.
The Turkish stock market is “very badly affected,” said Gerard Willems, an economist at Oxford Economics.
Lira crisis may push it into debt default
According to Willems, Turkey has had a wave of new foreign debt this year. “A lot of that debt came from banks with the assistance of a lira currency basket,” he said.
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Turkey has continued to issue bonds in dollar-denominated terms, giving investors exposure to its balance sheet, Willems said.
The sum of lending by banks to government amounted to 36% of gross domestic product in the second quarter of 2018, according to a study by Zafer Eksespor and Bilgic Eksespor published in Businessİl.
By comparison, according to the same study, no other economy in the world has higher levels of government bank lending.
Willems predicts Turkey’s government will start defaulting on debt, which could easily push its economy into default. “It would be a kind of self-reinforcing spiral,” he said.