Countries often seek the International Monetary Fund’s (IMF’s) financial support with the same enthusiasm that patients seek radical treatment from their oncologist.
However, like a critically ill patient who has little option but to seek his physician’s help, the depth of Turkey’s economic crisis leaves that country with little real alternative but to go to the IMF for financial assistance.
Sadly, President Recep Tayyip Erdogan seems to be in complete denial about the gravity of his country’s economic plight, and he shows no sign of being ready to come to political terms with the United States to facilitate a successful approach to the IMF.
This means that the Turkish economic crisis will likely deepen and that it will only be a matter of time before the global financial system has to deal with widespread Turkish corporate debt defaults.
If ever a country was facing a currency crisis that cried out for IMF help, it has to be Turkey. Over the past year, the Turkish currency lost around 30 percent of its value last year. It has done so as investors increasingly focused attention on years of over-borrowing, especially in U.S. dollars, by Turkey’s corporate sector.
It has also done so in response to Turkey’s grudging and inept policy response to the crisis as well as to the increasingly interventionist direction of its economic policy.
It has to be of particular concern that in recent weeks, after a brief period of stabilization, the Turkish lira has resumed its downward march.
This has been the case despite the fact that the central bank has raised interest rates to 24 percent and has burnt through one-third of its international reserves to support the currency ahead of the country’s local elections.
The resumed Turkish currency weakness has also occurred despite the Federal Reserve’s shift to an easier monetary policy stance.
The loss of investor confidence, coupled with the plunge in the currency, has taken a heavy toll on the Turkish economy. By the end of last year, the economy slipped into recession and registered its worst economic performance over the past decade. Meanwhile, unemployment has risen to 14.7 percent.
Absent a successful attempt to reverse the currency’s decline, there is every reason to fear that the worst of Turkey’s economic problems lie ahead of it. This is mainly because the country’s corporate sector has borrowed more than $300 billion, or 40 percent of GDP, in US dollar-denominated terms.
This raises the specter of a wave of corporate debt defaults, which risks crippling the Turkish banking system, as a weak currency and a deepening recession take their toll on the corporate sector’s balance sheet.
If the first stage of currency crisis resolution is that policymakers recognize that there is a problem, we have a lot to worry about with Turkey.
Far from seeking to assuage investors’ concerns or to get the U.S. on his side, President Erdogan seems to be going out of his way to undermine investor confidence and to preclude an early IMF assistance program.
He rants about the ills of high interest rates, he appointed his totally inexperienced son-in-law as the finance minister, and now he’s challenging the validity of the local election that his party lost in Istanbul.
He also thumbs his nose at the Americans by turning to Russia for military equipment, even though it is inconceivable that the IMF would come to Turkey’s rescue without the blessing of the United States, its largest shareholder.
It is regrettable that President Erdogan is yet to recognize that his government’s economic policy credibility is in shreds and that he desperately needs the imprimatur of the IMF to restore that credibility.
This would seem to suggest that the Turkish currency crisis will need to get a lot worse before Ankara makes the needed economic and political U-turn to get an international support package in place.
All of this this certainly does not bode well for the Turkish economy. A deepening Turkish economic crisis also does not augur well for the global economy, which the IMF correctly describes as being presently in a delicate state.
By Desmond Lachman
Source: The Hill
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
