Mr. Berat Albayrak, Turkey’s finance minister and President Erdogan’s son-in-law, seems intent on worsening his already severely dented credibility in the markets. At a time that his country is desperately in need of a coherent economic strategy to address its serious currency crisis, Mr. Berat is blithely assuring us that the Turkish economy will stage a sustained V-shaped recovery from its record 10 percent drop in the second quarter of this year. This lack of realism and economic crisis denial now threatens to accelerate the country’s currency free fall, which could spillover to the European banking system.
Anyone doubting how detached Mr. Albayrak has become from reality need only look at
his New Economic Program’s rosy economic scenario. At a time that his country is in the midst of a full-blown currency crisis and at a time that its tourist and export-dependent economy is about to be hit by a second European wave of the pandemic, Mr. Albayrak is assuring us that the Turkish economy will have fully bounced back by year end and will grow by almost 6 percent in 2021.
Similarly, Mr. Albayrak is happily reassuring us that Turkey’s inflation rate will decelerate from 10.5 percent at present to 8 percent in 2021. Never mind that the Turkish lira has already lost more than 25 percent of its value since the start of the year and that the country’s money supply is growing by more than 30 percent.
Nobody seems to have explained to Mr. Albayrak that full blown currency crises are normally
associated with accelerating inflation and declining output. This is all the more surprising since Turkey is no stranger to currency crises and to their negative economic consequences. This is especially the present case in Turkey, which has a very open economy, a weak banking system, and a corporate sector that is very heavily indebted in foreign currency. Indeed, one would think that it must be only a matter of time before we see a large number of Turkish companies laid low by the pandemic and the currency’s plunge.
Nor does anybody seem to have explained to Mr. Albayrak that stabilizing the currency will require a major U-turn in Turkey’s economic policy aimed at restoring market confidence. A good place to start would be to jettison President Erdogan’s harebrained notion that high interest rates are a cause rather than a cure for inflation. Over the past year, that notion has induced the Turkish central bank to approximately halve interest rates to a level below the
expected inflation rate. It would also help matters if Mr. Albayrak engaged less in fantasy in formulating his budget forecasts and if Mr. Erdogan could restrain himself from getting involved in foreign adventures in Syria and the Caucuses that alienates his European and US trade partners.
Failure by Turkey to get a handle soon on its currency crisis will certainly be bad for the Turkish economy. However, we would be making a mistake to think that a full-blown Turkish currency crisis would be confined to that country’s shores. Indeed, with a corporate sector that has more than US$300 billion in externally denominated debt that is held in large part by the European banking system, a further decline in the Turkish exchange rate could have untoward economic consequences as well for the rest of Europe.