Turkey's Economy Takes A Tumble. What's Next?

The Big Picture

After recent elections, the biggest challenge for the Turkish government was stabilizing the worrisome economy. But poor U.S.-Turkey relations and investor uncertainty about Turkey's ability to stabilize its volatile economy have pushed its currency, the lira, to an all-time low. Its crash is pressing on the country's dollar-denominated debt and raising questions about whether President Recep Tayyip Erdogan will temper his political moves to allow room for economic stabilization.

What Happened?

Turkish President Recep Tayyip Erdogan spoke before the nation twice on Aug. 10, but the country's currency continued its descent, reaching about 6.4 lire per dollar, a decline of about 14.6 percent. At one point during the day, it had fallen more than 20 percent. Meanwhile, new Treasury and Finance Minister Berat Albayrak, also the president's son-in-law, previewed a new economic program for the country. The president — instead of reassuring the markets, whose collapsing confidence is one of the main drivers behind the lira's unprecedented depreciation — slammed Western countries and accused them of waging economic warfare on Turkey. He returned to his familiar refrain of urging Turks to use their reserves of dollars, euros and gold to buy up lire. The markets reacted swiftly, and the lira dropped even further.  

What Are the Government's Options?

Erdogan won re-election in June and has secured an empowered presidency, leaving him freer to confront the country's economic challenges. Municipal elections are not until April 2019. But the question is whether Erdogan has the political will, and the ideological inclination, to change course.  

The government has political and economic options at its disposal to try to calm the currency's volatility, to keep inflation — now about 15 percent but climbing — under control and to reassure investors. The economic options include a central bank intervention by raising interest rates, although this would have a temporary effect, and Erdogan is famously hesitant to raise rates. (The last substantial hike was in January 2018; before then, it was in late 2013, when Turkey was dealing with the end of the U.S. Federal Reserve's quantitative easing program.) The country could also place controls on capital, but those can hamper private sector activity and won't be easy considering the government's relative inability to totally control private capital.

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