Turkey Edges Toward Recession in Tariff Spat With United States

Tom Ozimek
Updated:

Turkey’s battered lira weakened more than 6 percent against the dollar on Friday, Aug. 17, after a U.S. warning that Ankara should expect more economic sanctions unless it hands over the detained American evangelical pastor Andrew Brunson.

Brunson, called a “great patriot hostage” by President Donald Trump, has spent the better part of the past two years in Turkish prisons or other forms of detention, over alleged links to outlawed political groups.

The dispute over his release has put the two NATO allies at loggerheads, sparking an escalating tariff tit-for-tat.

Experts warn that the currency crisis risks infecting the broader economy, and question the unconventional way Turkish President Recep Tayyip Erdogan is trying to tackle the fallout.

The Threat of New US Sanctions

U.S. Treasury Secretary Steven Mnuchin told President Donald Trump at a cabinet meeting on Aug. 16, that sanctions were ready to be put in place if Brunson, who faces terrorism charges, was not freed.
“We have more that we are planning to do if they don’t release him [Brunson] quickly,” Mnuchin said, BBC reported.

Trump later said in a tweet the United States “will pay nothing” for Brunson’s release, “but we are cutting back on Turkey!”

Turkish officials say the case is a matter for the courts and vow not to fold under U.S. pressure.

Last week, the United States doubled its tariffs on metal imports from Turkey.

A Turkish court refused to release Brunson, and the government in Ankara raised tariffs on a range of U.S. goods–cars, alcohol, and tobacco.

Erdogan also said on Aug. 14, that Turkey would boycott electronic products from the United States, vowing to substitute foreign imports with domestically produced goods.

”We will impose a boycott on U.S. electronic products. If they have iPhones, there is Samsung on the other side,” Erdogan said at an assembly of his AK Party members in Ankara.

Turkey's President Tayyip Erdogan announces the new ministers of his cabinet during a press conference at the Presidential Palace in Ankara, Turkey, on July 9, 2018. (Stringer/Getty Images)
Turkey's President Tayyip Erdogan announces the new ministers of his cabinet during a press conference at the Presidential Palace in Ankara, Turkey, on July 9, 2018. Stringer/Getty Images
“We will produce every product we are importing from abroad with foreign currency here and we will be the ones exporting these products,” he said.

Turkey ‘Ready for War’

Erdogan has leveled accusations against the United States of trying to “bring Turkey to its knees.”
In what could be interpreted as a sign of further tensions, the Turkish president said at a meeting with ambassadors on Aug. 13, that Turkey is ready for war, as reported by the Turkish news service Ahval.

It was unclear whether Erdogan was referring to a trade war, or whether he was making a statement about military preparedness.

“The secret to successful states is their readiness for war. We are ready with everything we have,” Erdogan said, according to Ahval.

“It is everyone’s observation that the developments in foreign currency exchange have no financial basis and they are an attack on our country,” Erdogan said.

The Turkish lira has lost nearly 40 percent of its value against the dollar this year.

A money changer counts Turkish lira banknotes at a currency exchange office in Istanbul, Turkey Aug. 2, 2018. (Reuters/Murad Sezer/File Photo)
A money changer counts Turkish lira banknotes at a currency exchange office in Istanbul, Turkey Aug. 2, 2018. Reuters/Murad Sezer/File Photo

The currency crisis has deepened concerns about weaknesses in the broader economy—particularly Turkey’s dependence on energy imports and whether foreign-currency debt levels pose a risk to the banking sector.

But rather than adopt a standard remedy to an emerging-market crisis, namely de-escalate the conflict with the United States, raise interest rates, secure foreign-currency funding from an organization like the International Monetary Fund, and pursue systemic financial system improvements, Erdogan, a self-described “enemy of interest rates,” wants to lower borrowing costs despite the problem of double-digit inflation.

Rewriting the Crisis-Management Playbook

The crisis in Turkey follows a standard formula for how crises in emerging markets play out.

The usual suspects are: over-reliance on foreign-currency borrowing to drive economic growth, concerns by investors that central bank policy is prone to political gerrymandering, and a drying up of liquidity globally, caused in part by capital flight to the safe haven of the dollar, made more lucrative due to raising interest rates in the United States.

The standard emerging-market response is to seek an external funding anchor—such as a line of credit with the International Monetary Fund—and interest rates to attract investment in the weakening currency.

Higher interest rates and potentially stringent IMF funding conditions typically mean some order of unpopular austerity, which carries a political risk for leaders reliant on keeping voters happy through lax monetary policy.

Turkey has vocally rejected both measures–raising rates and the IMF backstop–opting instead for an unconventional mix.

Turkey has mobilized $15 billion from Qatar for direct investment.

The central bank has provided liquidity to domestic banks. The Turkish banking watchdog (BDDK) has taken steps to stabilize the currency, limiting futures transactions for offshore investors and lowering limits on swap transactions.

Other measures include promising to curtail credit and fiscal excesses and disavowing capital controls to reassure investors the government won’t seize foreign-denominated assets.

But economists have said they want to see decisive moves by the central bank, rather than technical measures.

U.S. pastor Andrew Brunson arrives at his home after being released from prison in Izmir, Turkey on July 25, 2018. (Demiroren News Agency/DHA via Reuters)
U.S. pastor Andrew Brunson arrives at his home after being released from prison in Izmir, Turkey on July 25, 2018. Demiroren News Agency/DHA via Reuters

Turkey and its firms face repayments of nearly $3.8 billion on foreign currency bonds in October, Societe General calculated. For companies, the cost of servicing foreign debt has risen by a quarter in lira terms in the past two months alone.

Ratings agency Standard & Poor’s is scheduled to release a review of Turkey’s sovereign credit rating after the market close on Aug. 17.

Turkey’s non-standard maneuvering is a long shot, said Mohamed El-Erian, chief economic adviser at Allianz and former chairman of the U.S. Global Development Council, according to the Guardian.

“It is possible, but not probable,” El-Erian says.

There are flaws with Turkey’s gambit, including the fact that the funds from Qatar are not as reliable a proposition as IMF-branded liquidity, and they are small relative to Turkey’s external funding needs.

And time is running out for Turkey as it tries to write a novel chapter in the crisis-management handbook.

“It is unlikely that a critical mass of corrective steps has been attained in Turkey,” El-Erian says.

“While the domestic policy adjustments provide short-term relief for the currency, they may be neither comprehensive nor sufficient as yet to return Turkey to a promising path for inclusive economic growth and durable financial stability.”

Turkey’s best course of action, El-Erian says, is for Ankara to “seek a way to pause the skirmish while working on the longer-term underlying issues.”

Experts say markets need more than technical remedies like the central bank’s promise to provide emergency liquidity to banks, or the government’s promise not to seize dollar-denominated bank deposits.

For one, raising interest rates is needed to calm markets and stem the lira’s sell-off.

“What you want to see is tight monetary policy, a tight fiscal policy, and a recognition that there might be some short-term economic pain—but without it there’s just no credibility of promises to restabilize things,” said Craig Botham, Emerging Markets Economist at Schroders.

Economists warn the currency crisis could spill over into full-blown economic recession.

“The plunge in the lira, which began in May, now looks certain to push the Turkish economy into recession,” Andrew Kenningham, chief global economist at Capital Economics, told Reuters.

Turkey is dependent on imports, priced in hard currency, for almost all of its energy needs.

For years Turkish firms have borrowed in dollars and lira to take advantage of lower interest rates.

But now, the sell-off has increased the cost of servicing that debt, particularly for companies whose revenues are solely in lira.

Turkey has the highest foreign exchange-denominated debt among emerging markets, Societe Generale said in a note on Aug. 17, estimating its short-term external debt at $180 billion and total external debt at $460 billion.

Reuters contributed to this report
Tom Ozimek
Tom Ozimek
Reporter
Tom Ozimek is a senior reporter for The Epoch Times. He has a broad background in journalism, deposit insurance, marketing and communications, and adult education.
twitter
Related Topics