The Turkish leader's intentions in Syria and Libya are causing a period of instability, with the lira at its weakest level since May

Turkey's economy collapses in the face of Erdogan's ambitions

photo_camera REUTERS/Murad Sezer - Currency exchange office in Istanbul, Turkey

Almost a year ago, Turkey was entering into an economic recession for the first time in 10 years. According to the Turkish Statiscal Institute the Eurasian country had grown by 2.6% in 2018 in comparison with 7.4% in 2017. The worst data recorded since 2009.

Now, the open conflicts in Syria and Libya are once again taking their toll on the Turkish President, Recep Tayyip Erdogan. His ambitions, which so far seem to have no limits - also nobody to stop him - are having an impact on the national economy. While in the country led by Bachar al-Asad Ankara has launched an offensive in the Idlib region - one of the last two rebel strongholds - against the Syrian army and the Russian positions, which is costing him the lives of his own soldiers; on Libyan territory, the Turkish leader has given the order to deploy about 11.000 “volunteers” - mainly Syrian mercenaries, also financed by Qatar - to support the interests of the Government of National Unity (GNA), headed by Prime Minister Fayez Sarraj and sponsored by the UN. The presence of the Turkish Army itself on Libyan territory has also been noted, with the costs that this implies.

Thus, this week, the Turkish lira has recorded its weakest level since last May. With a fall of 0.3% against the dollar, investors, mentioned by Al-Ain, warn that "excessive monetary easing may undermine the strength of the moneys, in view of the increase in inflation in recent months. So far in 2020, the national currency has lost about 2% and, in the last two years, the fall has been accentuated to 36%. The lira has also suffered a reduction in value against the euro, by 0.2%. For its part, inflation has surpassed the 12-13% barrier.

In this line, it’s worth remembering that the Central Bank of Turkey announced a new cut in the interest rate - an economic indicator that indicates the profitability of a saving or investment, in other words, the “price of money” - by 50 basic points to 10.75%. Last July, the interest rate stood at 24%.

“The fall in the interest rate, together with a massive sale of emerging markets and concerns about the conflict in Syria, has put pressure on the currency”, say analysts Laura Pitel, Tommy Stubbington and Anna Gross in the Financial Times.

Other warning signs of the deteriorating state of the Turkish economy include a fall in the Istanbul Stock Exchange's benchmark index by 0.9%, a rise in the foreign trade deficit to $402 million from $89 million in the same period last year, and a stagnant unemployment rate of 15%.

In addition, this Saturday, the Federation of Trucking Exchanges and Chambers of Commerce reported that the number of companies closed in Turkey increased in January this year by 9.91%, over the figure for the same month in 2019. Among the most affected sectors, the note highlights the retail and wholesale trade, especially car repair businesses, construction, with 427 companies closed, and manufacturing industry, with 262. In a previous statement, the entity already warned that between last November and last December, the volume of companies that ended their activities increased by 112.66%, coinciding in time with the first information on the Turkish presence in Libya.

In this scenario, the analyst Güldem Atabay predicts in the local newspaper Ahval News that "foreign investors will continue to leave the Turkish market en masse". In this sense, expert Ayla Jean Yackley explains in Al-Monitor that, despite the fact that money is cheaper with the drop in interest rates, "foreigners continue to sell more Turkish assets than they buy". As of February 7, they sold a total of 435 million dollars in shares, compared to purchases valued at 419 million. According to Bloomberg data, total foreign investment in Turkish shares has fallen by 1.6 billion dollars year-on-year. In addition, the share of foreign investors in local currency debt has been reduced to a historical low of 11%. 

Foreign Direct Investment (FDI) plummeted by 30% during 2019, reaching its lowest level since 2004. “The government's efforts to control the financial markets are clearly a deterrent to investors like us”, says Gilles Seurat, fund manager of Paris-based La Française, in the Financial Times.

For all these reasons, “today, Turkey's economy is even more vulnerable to a smaller increase in economic growth, and even more so to overheating [as a result of policies that risked a deterioration in crucial indicators for the sake of greater growth]”, notes Atabay, who also recalls that the crisis that the Eurasian country suffered in 2018 was due to similar factors that are now at work. “Difficult days are coming”, the expert concludes. 

More in Economy and business