E Turkey’s Financial Problems Are Starting To Resemble The Greek Crisis Of 2010

“Some market pundits continue to claim that developments in Turkey will remain contained to that country. We heard similar comments just before the Greek crisis. Yet, it is worth noting that foreign banks’ exposure to Turkey ($260 billion) is just as large as in Greece circa 2008…. Canadian banks, unlike their European counterparts, have very limited exposure to Turkey. Making matters worse for the Turkish economy is that roughly 35% of loans made by its domestic banks are in foreign currencies ($258 billion of which 57% are in USD and 43% in Euros according to the BIS).” (National Bank Hot Charts, August 13, 2018)

“The parallels between the two strongman presidents, Donald Trump and Tayyip Erdogan, are strange especially since they are now fighting each other politically and economically, with Turkey losing badly. Instead of acknowledging the current economic issues and enacting policy changes that would stabilize the Turkish economy, Erdogan is digging in, which means the crisis in Turkey will get worse before it gets better.” (Rob Koyfman, Turkey’s President Erdogan Playing Chicken With Investors, Forbes, Aug 15, 2018)

Up to very recently, Turkey had no problem in attracting huge amounts of foreign investment.

Turkey has a well-educated population of 83 million, its GDP is the 17th-largest in the world, and of course, it is still a NATO member. But as striking as these figures are there is a dark cloud hanging over the Turkish economy, namely its president Recep Tayyip Erdogan. He is running roughshod over democracy at home and is sounding more and more like Donald Trump.

A little bit of context on the economy. Turkey’s economy is rather unbalanced and has been overheating over the past few years. Unemployment in Turkey is still very high at 10%. Turkey’s real economic growth was a steep 7.4% y/y pace in the first quarter, and the economy’s growth rate was recently as high as 10%.

But inflation has also been accelerating in Turkey, with the latest CPI annual hike close to 16%. Inflation will escalate even faster very soon because of the collapse of the lira and increased import prices. Moreover, it will be very difficult to unwind an inflationary cycle in environment where the economy is already so overheated and unbalanced.