Aug 15 2018

Turkey stuck in emerging-market debt script – Bloomberg

Turkey, which does much of its borrowing in foreign currency, will be unable to pay its dollar or euro-denominated debt as it currency continues to lose value in a crisis model common to emerging markets, wrote Noah Smith, opinion columnist for Bloomberg.

Turkey has been slapped with sanctions by the United States over its detention of U.S. evangelical pastor Andrew Brunson, sparking a currency crisis that drove the lira to a record low of 7.23 per dollar while creating fears of a full-blown financial crisis.

What happened in Turkey, “resembles what happened to Southeast Asian and East European countries in the late 1990s, and to Latin American countries in the 1980s, '90s, and '00s,” Smith wrote, noting that Turkey itself suffered this kind of episode in 2000-01, which ironically brought Turkish President Recep Tayyip Erdoğan’s Justice and Development Party (AKP) to power.

Exactly how these crises happen is a mystery, the article said. Economists have tried to explain sudden outflows of capital from emerging markets as coordinated attacks by currency speculators, or herd behaviour or a variety of other phenomena.

President Donald Trump’s threats against Turkey happened to take place at a point where an erratic, unreliable signal managed to push Ankara into the danger zone, Smith said. The more important issue remains why Turkey’s economy was so vulnerable in the first place.

“Turkey’s economy seems to have been doing just fine under its president, Recep Tayyip Erdoğan,” Smith wrote, with Turkey becoming an upper-middle-income country, with a per-capita gross domestic product similar to that of Hungary, Greece or Poland.

Underneath the surface, however, not all was well.

Turkish economists have fretted that growth relies too much on debt, the Bloomberg columnists said, with the country running big current account deficits after Erdoğan’s party came to power.

Meanwhile, Turkey’s strongman has committed himself to massive construction projects, including a canal through Istanbul and a giant new airport in the city.

But borrowing foreign money to fund domestic real estate speculation has never been a sustainable strategy for economic development, Smith pointed out.

“There’s a good chance that Erdoğan’s megaprojects will turn out to be white elephants, that real-estate speculation will lead to high debt and waves of defaults and much construction will turn out to be un-economical.”

Smith said the longer-term damage to an economy with high debt levels and too many resources oriented toward real estate and construction, could be harder to escape.