Turkey’s economy is entering a ‘slow burning crisis,’ analysts warn

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Turkish President Recep Tayyip Erdogan speaks during Russian-Turkish-Iranian talks at Black Sea resort of Sochi, Russia, November 22, 2017.

Turkey’s economy is overheating and if the government doesn’t act then the country is in trouble, according to several analysts.

“The government has no intention of tackling imbalances or overheating,” Marcus Chevenix, global political research analyst at TS Lombard, said in a research note this week. “It is this unwillingness to act that leads us to believe that we can now say that Turkey is entering a slow burning crisis.”

The Turkish lira is at a record low against the dollar, and is ranked among the worst-performing currencies this year. After comments this week by Turkish President Recep Erdogan promising to lower interest rates after the country’s June election, the currency tanked to its lowest point yet against the greenback, hitting 4.4527 on Tuesday mid-afternoon. The dollar has appreciated by around 18 percent against the lira so far this year.

The reason? Erdogan has been sitting on interest rates, opting for a monetary policy that prioritizes growth over controlling its double-digit inflation. Turkey’s growth rate reached an impressive 7.4 percent for 2017 and leads the G-20, but at the expense of inflation, which has shot up to 10.9 percent.

Market sentiment has driven much of the lira’s sell-off, as investors worry about government intervention in monetary policy and central bank independence. Investors have been hoping for a rate rise by the bank, but that now appears unlikely.

Erdogan plays an unusually heavy-handed role in deciding his country’s monetary policy, and many observers say he keeps the Central Bank of the Republic of Turkey’s (TCMB) hands tied. The bank finally raised its rates for the first time in several sessions in late April, moving its late liquidity window rate (which it uses to set policy) up by 75 basis points to 13.5 percent. The lira temporarily jumped on the news.

But Erdogan aims to bring the rate back down, saying it must be done to ease pressure on Turkish households and drive the growth needed to create jobs for Turkey’s youth.