Alwaght- The Turkish national currency lira has experienced a record low on June 2 after President Recep Tayyip Erdogan renewed his call for interest rate cuts. Immediately after his remarks, the lira slumped 4 percent, trading 8.88 against the US dollar, though it made gains shortly later to trade 8.59. The news attracted the focus on the Turkish economy, prompting questions about what are the causes of the current economic situation in the country and what is the outlook.
The battle between interest rates and double-digit inflation and Erdogan’s interventions
In the present situation, investors are deeply concerned about the lack of independence of the Turkish central bank from Erdogan's views. Erdogan calls interest rates “mother of evil”. However, with the fall of the lira value and existence of double-digit inflation for the third year in a row, experts believe that interest rates should remain high to avoid prices slipping out of control.
It is noteworthy that the policy of cutting interest rates has been on the agenda of the Turkish government since the summer of 2019. At the time, Turkish officials expected rising exports and tourism revenues to significantly establish hard currency inflows into the country and help stabilize the country's economic situation. In fact, Ankara officials wanted to offset the increase in dollar demand caused by the capital outflows with incoming currency from sectors such as exports and tourism, but the coronavirus outbreak seriously marred the Turkish policymakers' expectations of the tourism and world trade industry.
This situation is while earlier most economists and even the International Monetary Fund (IMF) had stressed that the Turkish economy must readjust its monetary policy to reduce inflation in the face of economic shocks, and that the central bank must focus on rebuilding foreign exchange reserves. However, the president's insistence on severe opposition to higher interest rates, which can be read within the framework of an economic expansion policy that will lead to higher inflation, has exacerbated the financial crisis. In economists’ viewpoint, Erdogan’s “unscientific” view has led to breach of basic economic principles and is based on the “impossible trio” of nailed foreign currency rate, free flow of capital, and independent monetary policy.
Role of coronavirus and previous crises
In addition to the unprofessional interventions of the president in the economic management, the outbreak of the epidemic over the past two years has played an unprecedented role in the aggravation of the economic crisis in the country. In fact, the outbreak of the coronavirus has seriously damaged Turkey's tourism industry as one of the country's economic pillars. Additionally, Turkey's economy, industry and trade were also hit by an unprecedented crisis due to the global coronavirus outbreak. As the COVID-19 hit, foreign reserves drop made the Turkish economy more vulnerable to possible shocks than ever before.
In addition to coronavirus, another damaging factor in the economic crisis in Turkey is US sanctions and Ankara tensions with the European countries. The Trump administration's sanctions against Turkey, the intervention of the UAE and Saudi Arabia in the Turkish foreign exchange market, and the escalation of disputes between EU member states and Turkey have caused a wave of psychological concerns among investors in the industry and trade sectors of Turkey.
Also, over the past few years, investors have called for strict fiscal policies in Turkey to moderate inflation of more than 15 percent and prevent foreign investors from leaving. In fact, high inflation in Turkey has delayed foreign investments in the country. In this regard, Robin Brooks, the chief economist at the Institute of International Finance believes that Turkey is in danger of withdrawal of big investors, which will affect the value of the lira. Even it is possible that in the near future Erdogan will sack the central bank to clear himself of the lira price slump.
Erdogan seeks remedy from the sea depth
The Turkish economy grew dramatically since the Justice and Development Party (AKP) assumed the power in 2002. Achieving single-digit inflation and double-digit economic growth have become a context in which Erdogan and his popular party have won the consent and trust of Turkish citizens and held the reins of power for nearly two decades. However, in the years following the failed coup in July 2016 against the president, the Turkish economy has grown extremely vulnerable and shrinking. Continued repression and politico-security arrests after the coup severely reduced economic growth and, in addition, the Turkish involvement in Syria and Iraq doubled government spending. The spread of the coronavirus and the intervention of foreign actors in the Turkish financial and foreign exchange market all led to the deterioration of the Turkish economic conditions.
However, in drawing Turkey's economic outlook, two important points in the midst of the current economic crisis can be noted: Turkey's focus on energy exploration and its growing interest in partnership with the East whose face is China.
In recent years, the Turkish government has undertaken extensive exploratory operations to develop gas fields in the Black Sea and the Eastern Mediterranean, which has been strongly opposed by other Mediterranean coastal countries. Turkey's trade deal with the National Unity Government of Libya raised hopes in Turkey that it will become an energy hub and even a gas exporter, and Erdogan views this as a cure for Turkey's crisis-ridden economy. In other words, the Turkish leaders are optimistic that investment in the gas fields can dramatically cut the country’s high costs of energy purchases.
At a ceremony held to celebrate launching new port of Filyos at the Black Sea coast last week, Erdogan said that Turkey discovered a new gas field in the Black Sea that would increase the country’s gas reserves to 504 billion cubic meters.
"Our Fatih drill ship made a discovery of 135 billion cubic meters of natural gas in the Amasra-1 borehole in the Sakarya gas field," Erdogan told the opening ceremony in the Black Sea province of Zonguldak.
Erdogan also unveiled a three-phase plan to transfer gas from the sea to the land, adding that Ankara aims to pump gas from the Sakarya field to its main grid in 2023, with sustained plateau production starting in 2027 or 2028. Presently, Turkey imports almost all of its gas. If it can extract 540 billion cubic meters of natural gas reserves explored in the Black Sea, its dependence on energy imports from Russia, Iran and Azerbaijan, which cost the country $41 billion a year, will be cut. So, production in the new gas fields can improve to a degree the Turkish economy.
The Turkish economic crisis, one of whose causes is the US-led Western sanctions, can pave the way for the Turkish pivot to China. Currently, China is the second largest trade partner to Turkey after Germany and is the main origin of its imports. The Asian economic heavyweight has a large presence in the Turkish economy. Pacific Cosco, China’s state container ship company, now holds 65 percent of Turkey’s third largest port, and the partnership in the Turkish ports in the Black, Aegean, and Mediterranean Seas is highly tempting for China. Therefore, in the not-too-distant future, tight Ankara-Beijing economic partnership looks likely.
