Mar 28 2018

Turkey’s overheating economy is its No. 1 security threat

Turkey’s overheating economy has become the country’s number one national security threat, writes Scott MacDonald, Senior Managing Director at consulting firm KWR International, in the National Interest.

Eyeing elections in November 2019, Turkish President Recep Tayyip Erdogan is taking a major gamble on international economic conditions remaining conducive to investors putting their money increasingly at risk in Turkey, according to MacDonald.

“Considering the shifting tides of geopolitics and rising prospects for a major financial markets correction at some point in the months ahead that could be a bad bet,” he said. “Turkey appears to be heading for a major economic crisis, much of it of its own making.”

Turkey’s lira slumped to a record low of 4.03 against the dollar last week, even as most currencies in emerging markets made gains against the greenback. Behind the slump were concerns about the country’s widening current account deficit and double-digit inflation, which Erdogan says is caused by high interest rates, in contravention to traditional economic thinking.

The International Monetary Fund has warned about overheating and growing oversupply in the construction industry. Meanwhile, Moody’s cut Turkish debt by one notch to two steps below investment grade this month saying Erdogan’s increasing grip over political power raised uncertainty about economic policy and threatened the independence of institutions such as the central bank.

“Turkey’s economic problems cannot be swept under the carpet,” said MacDonald. “The problem for Turkey is that it plans to keep pump-priming the economy as the Federal Reserve and European Central Bank tighten monetary policy, which means the cost of borrowed money is on the rise. This type of policy may achieve another year of strong growth, but it sets the stage for a hard-landing.”