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  • 2018/09/11
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Turkey: when geopolitics takes shape…

This is not Turkey’s first currency crisis: in fact, Turkey is one of the emerging countries to have experienced the most such crises. The frequency of these crises is explained by a traditionally “stop-and-go” growth profile: during an upturn, consumption and credit pick up quickly, causing the economy to overheat, which in turn causes the currency to stall. This same pattern has been observed this year, with first quarter growth coming in at 7.5%, well ahead of estimated growth potential of 4.5%. In a way, then, the adjustment was inevitable – all the more so with a government threatening to adopt a completely inappropriate fiscal stimulus policy. This time around, however, the crisis is much more severe, and not only for the Turks.

The first reason for concern is the huge amount of short-term funding required – the highest of any emerging country. Turkey is thus dependent on market confidence to finance its debt and is highly exposed to rising US interest rates. Faced with this situation, foreign currency reserves genuinely available to the state (US$29 billion) are much too low – something not all investors were aware of. This type of equation is rare, but it becomes explosive as soon as confidence among lenders begins to falter. Lastly, note that Turkish debt is mainly private, since the state does not have much borrowing. As such, it is first and foremost companies and banks that risk facing liquidity shortages over the coming months, choked by the currency slump.

Another reason to fear a long and severe crisis is that in Turkey, economic and political risks constantly interpenetrate. And it is this opaque mix that has so deeply eroded future visibility and, consequently, investor confidence. It would therefore be a mistake to boil any analysis down to the financial dimension alone, without taking full account of the political risks.

The regime’s increasingly authoritarian stance had already been affecting the economy for several years through state pressure on the central bank, the government’s lack of credibility in terms of its ability to implement structural reform, Erdogan’s reluctance to implement a traditional policy to defend the currency, and the loss of statistical transparency. However, things have gone further since the last election: you would have to be blind not to see the scars left by authoritarian regimes losing touch with reality, whether by rewriting the fundamental rules of the economy or by advancing financial conspiracy theories based on a paranoid view of the outside world. It is this paranoia, withdrawal and risk of irrationality that markets are most afraid of.

Lastly, on top of all this are the geopolitical risks and the brutal uncertainties of the world of Donald Trump. Let us not forget that the affair of the imprisoned US pastor angered a section of the US electorate enough to prompt the president to hike import duties on some Turkish products. While it is difficult to say who will “win” the China/US trade war, it is easy to predict that Turkey will be the loser in any clash with the US. But above all, in the background to all this is the history of Turkey/US relations, which have been deteriorating for a long time. Friction has steadily increased since Turkey accused preacher Muhammed Gülen, whom the US refuses to extradite, of fomenting the 2016 coup. Meanwhile, in the background, the Kurdish issue rumbles on. We must never forget that the prospect of a Kurdish state is Erdogan’s worst nightmare.

Erdogan thus dreamed up a new negotiating strategy this summer: engaging in geopolitical blackmail in response to a financial crisis by threatening to “find new allies”. To spell it out clearly, a scenario where Ankara pulled out of NATO would be a disaster for Europe, obviously because Turkey is the link that controls migratory flows, but also because it is what is known in geopolitical theory as a “pivot state” on whose stability that of an entire region depends.

This crisis is raising questions over Turkey’s alliances in a world in which it is no longer very clear who is allied with whom. This is a major global risk.

Tania Sollogoub tania.sollogoub@credit-agricole-sa.fr

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