Volatility for the stock, bond and currency markets increased significantly today. The big story of the moment is the dramatic plunge of the Turkish lira against the US dollar. The currency at the close in Istanbul today fell to 10- year lows versus the US Dollar, Euro and Japanese Yen.
Turkey’s central bank stepped in to halt the lira’s precipitous decline by hiking its key interest rate to 16.5%. Whether that is enough remains to be seen. President Erdogan, who is running for reelection, will probably not introduce capital controls, a move that would be more effective and longer lasting.
Will he win the election? Most probably he will. Will that mean the currency will be more stable? Probably yes since Erdogan effectively has taken over the running of the central bank. Moreover, will that mean another coup attempt is in the offing? Probably not now. The last attempt ended in utter failure. But that was when the economy was doing fairly well.
With a GDP of $0.9 Trillion the country of 81 million ranks 17th in the world. It’s economy is roughly one quarter the size of Germany’s economy. Germany is the Europe’s preeminent economy and a country that has a huge Turkish population.
To put Turkey’s economic problems into a global perspective neighboring Greece has a GDP of only $195 billion, a much smaller economy. Consequently, Turkey’s influence on the rest of Europe is much more significant than Greece’s. What happens there is still of major concern to the EU member countries.
Turkey is in crisis mode and indications are that the problems facing president Erdogan will not go away easily and quickly. The economy is doing only so-so. The country’s external accounts position is dismally poor with a $4.8 billion deficit in April, unemployment is at 11.6% and the CPI in April rose 11.85%. The tourist industry remains a bright spot, however. The big question is, of course, whether the electorate will overlook all the negatives and keep him in power. Unfortunately, they probably will support him and he will win.