August 14, 2018
For years, Turkey encouraged sectors that lavishly borrowed and spent foreign exchange rather than investments that would generate much-needed hard currency. The party is now over. Ruled by the Islamist Justice and Development Party (AKP) since 2002, the country has amassed a giant external debt of $466 billion. Although the writing was on the wall for months, the Turkish economy hit the rocks last week.
Plagued by a chronic current account deficit and unrelenting inflation and unemployment rates, the Turkish economy’s burden has recently grown with gaping public deficits, resulting in “non-investment” grades by international credit rating agencies. On top of all this came severe tensions with the United States that resulted in unprecedented sanctions on Ankara, culminating in a Black Friday for the Turkish economy Aug. 10.
The economic hemorrhage is continuing and the real sector is on the edge. Many now wonder which businesses are first in line to throw in the towel. Are companies close to the AKP among them and could they receive a lifesaver from the government? The turmoil is so encompassing that few companies are likely to escape unscathed. Still, the cronies could be in a greater danger. Before discussing why, a brief overview of how Black Friday transpired is worthwhile.
No doubt, the row between Ankara and Washington bore on the turbulence that led to Black Friday, but Turkey’s economic indicators this year were already alarming. Inflation jumped to almost 16% in July, and the year-on-year current account deficit never eased below $57 billion, reaching 7% of gross domestic product. Despite government incentives to sustain economic growth, the seasonally adjusted unemployment rate kept growing. Fiscal discipline was undone, leading to significant public deficits. Turkey’s risk premium, reflected in credit default swaps, was already at about 320 basis points, sharply decoupling from other emerging economies. Hence, the tensions with Washington only aggravated this gloomy outlook.