Turkey’s currency fell 7% on Monday — totaling a fall of 45% since the beginning of the year. Economic sanctions, rampant lending, and low interest rates have all contributed to a situation in which the Turkish Lira is in free fall, and it appears as though the country itself may be in dire economic trouble.
Not only is Turkey experiencing strong levels of inflation, but they are also extremely reliant on both the United States and Europe — and embroiled in threats of trade wars.
Companies in Turkey have been borrowing cheap money from the United States. With the new rate increases by the U.S. Federal Reserve, companies in Turkey are now finding it more expensive to pay off their debts. This has an additional impact of making investors wary of investing in Turkish businesses, as they now appear to be distressed.
Additionally, lending outside of the country had weakened the currency to begin with, as it meant that Turkey has been doing less money lending within its borders. Lending within a country keeps wealth within the country.
It’s not just lending that’s made investors nervous; there have also been recent trade disputes with the United States. The United States recently levied sanctions on Turkey, which has made the rest of the world somewhat nervous regarding what the future could hold. The doubling of tariffs on steel and aluminum from Turkey has the potential to be very harmful, as the US is Turkey’s largest export market for steel.
June saw Turkey hit 15.9% annual inflation, which indicates that its economy may be about to overheat. The country has been relying upon its external debts and investments in order to continue to grow.
Classically, the major way to reduce inflation is to raise interest rates. Turkey has avoided interest rate increases within their own country, perhaps as a way to keep internal lending attractive. This lack of rate increases has made it so that inflation has continued to rise, and many consumers may be over-leveraging themselves.
Raising interest rates may slow growth, but it also makes growth more stable. The economic policy of Turkey is controversial, and there are those who believe that it has directly contributed to the poor financial situation. Faith in leadership, consequently, may also be impacting the country’s optimism.
As Lira falls, it becomes more expensive to pay loans in dollars. Many Turkish businesses took out loans in U.S. dollars that will now be far more costly to pay back. If the Lira falls against the dollar by 40%, these businesses now own 40% more. Loans between countries in this way are usually not this volatile, especially over short-term lending. With Lira falling so quickly and so far, businesses are now finding themselves confronted with the need to produce significantly more capital.
This will ultimately lead to many companies going bankrupt or needing to borrow even more money locally in order to pay their debts. Potentially, it could lead to companies taking out cheap loans within Turkey while the interest rates are still low, which will ultimately lead to further inflation.
If Turkey’s economy crashes, both the United States and the European market will have debts that they cannot collect on, which could expose investors to risk. The investments that the US and Europe have made in Turkey rely on Turkey’s ability to pay them back.
Further, economic problems in Turkey could also lead to Turkey displacing migrants who are currently existing there. About 4 million migrants, many from Syria, are in Turkey right now. If they become displaced, they could flood into the rest of Europe. Not only can migrants be expensive for a country, but they are extremely controversial right now. A flood of immigrants in the EU could potentially lead to significant political turmoil.
For the United States, Turkey’s economic situation is closely related to tariffs and political relations. As disputes continue, it is possible that the United States will be able to significantly damage the economy of Turkey, by levying additional tariffs and sanctions. At the same time, a damaged Turkey is an effectively insolvent Turkey.
If Turkey’s situation continued to worsen, it may not be able to fulfill its debts to the US or EU. Unfortunately, many of the factors leading to Turkey’s crash are not being addressed. Interest remains high, borrowing continued, and the tariff wars still remain unresolved. The Lira is exceptionally volatile as well, in a news-related way that may ultimately benefit foreign exchange traders. Investors overall may be wary of investing in Turkish companies.
Regards,
Ethan Warrick
Editor
Wealth Authority
