21 Sep 18

Crisis in Turkey: What's going on?

After a long period of prosperity and stability, the Turkish economy is suffering from high inflation, rising borrowing costs and rising loan defaults. Leasing companies feel the backlash, too, but that didn't stop Alphabet from starting operations in the country.

Read our full coverage on the crisis in Turkey:

To understand where it started, we have to go back to the start of the new millennium. In 2001, Kemal Dervis, a former World Bank official, was nominated the Turkish economy minister. He negotiated a substantial IMF loan to create financial breathing space for his country. The central bank was given more independence and the lira was allowed to float. When Recep Tayyip Erdogan became prime minister in 2003, he stuck to this policy.

The economy flourished but it still had an underlying weakness. A common trait of countries with a history of high inflation is that savings are low. This is also the case in Turkey and this means foreign capital is needed to fund investments when the economy picks up. Since the turn of the century, the country's debt has steadily grown.

What doesn't help, is Mr Erdogan's unconventional view on interest rates. He doesn't agree with the general opinion that rising inflation in Turkey is a sign that interest rates are too low. Instead, he maintains high interest rates cause inflation. His strong-arm tactics have forced the central bank to agree with him and not increase interest rates.

Mr Erdogan's regime is, according to a Bloomberg report, moving towards a "textbook institutional decline", with Mr Erdogan voicing an Islamist discourse of interest-based banking as "prohibited by Islam" and interest rates as "treason", which doesn't help.

According to economist Paul Krugman in the New York Times, the unfolding crisis is a classic currency-and-debt crisis. "At such a time," he says, "the quality of leadership matters a great deal. You need officials who understand what's happening, can devise a response and have enough credibility that markets give them the benefit of the doubt." He added: "The Erdogan regime has none of that."

Image: Turkish economic growth depended in large part on government-funded construction projects.

Authored by: Benjamin Uyttebroeck