On August 29th, Turkish President Recep Tayyip Erdogan said that Turkey’s economic infrastructure is strong enough to rescue itself from the current economic turmoil. The Turkish authorities say that the country’s economy has recently been targeted by speculators which aim to destabilize it.
While speaking at an award ceremony held by the Radio Television Journalists Association, Erdogan said: “They want to put pressure on us by using the economy.”
Political tensions between Ankara and Washington sparked worries in markets this month, after U.S. President Donald Trump doubled tariffs on the import of Turkish steel and aluminum on August 10th. On August 16th Treasury Secretary Steven Mnuchin threatened with more economic sanctions. The falling out between Washington and Ankara is due to an American Pastor, Andrew Brunson, who is in jail in Turkey, with charges for taking part in the failed 2016 coup attempt.
“It is impossible for us to step back with such threats,” Erdogan said.
“There are structural problems to be solved in Turkey’s economy. We already know them, and we are working on the solution,” Erdogan added.
Earlier on the same day, Turkish Finance Minister Berat Albayrak, who is also Erdogan’s son-in-law, said that the country’s economy did not face any significant risks, despite the lira’s value plunging to a two-week low, after it started collapse rapidly on August 10th.
Albayrak’s comments came after came after credit rating agency Moody’s downgraded 20 Turkish financial institutions on Tuesday. “We do not see a big risk about Turkey’s economy and financial system,” the minister was cited as saying when he was asked about the biggest risk for 2019.
“Our economy has strong fundamentals. The main point here is for us to examine what our deficiencies are … In this regard, we will realize the required structural reforms,” he further commented.
Turkish Finance Minister Albayrak, on August 28th, also warned that US sanctions against Ankara could destabilize the Middle East. Reuters reported that after meeting his French counterpart in Paris, Albayrak highlighted Ankara’s desire for better ties with Europe and condemned the US, saying US sanctions could ultimately aggravate the region’s terrorism and refugee crises.
The Financial Times cited analysts who warned that Turkey faced a rapid slowdown and risked a painful recession unless policymakers took urgent steps to rebalance the economy and bolster investor confidence.
“The latest signs show that higher inflation, coupled with a severe tightening of financial conditions, is filtering through into an abrupt slowdown in economic growth,” said Jason Tuvey of Capital Economics consultancy.
The central bank also continues to ignore all calls from investors for a large interest rate rise, reinforcing the understanding that Erdogan controls it. The President declares himself an “enemy” of high interest rates.
A subsequent sell-off in the lira has raised concerns about the effect on the broader economy – given Turkey’s reliance on dollar-denominated energy imports – and a possible surge in bad loans in the banking sector.
Al Jazeera also reported that Investors are also worried by a US Treasury investigation into state-owned Halkbank, which could face a potentially large fine over allegations of busting sanctions on Iran. The bank has said all its transactions were legal.
The Turkish lira has lost about 40% of its value against the US dollar in 2018, with the sanctions on two Turkish Ministers on August 1st and the increase in tariffs on Turkish steel and aluminum triggered the rapid loss of value. In response Turkey announced increased tariffs on U.S. products, raising duties on American alcohol to 140 percent, autos to 120 percent and tobacco to 60 percent. Tariffs were also doubled on cosmetics, rice and coal.
In addition to demanding the release of Andrew Brunson, Turkey and the US are also at odds over their diverging interests in Syria and US objections to Ankara’s plan to buy Russian S-400 Triumf defense systems.