In an uncertain global economy, Turkey may be the most at risk

  • financial warning
- Peter S Goodman, YENIKOY (Turkey)

Jul 12, 2018-

Looming like a fortress over the Black Sea, Istanbul’s new airport has been engineered to provoke awe, underscoring Turkey’s desire to reclaim its imperial glory.

The project is expected to cost nearly $12 billion and carve six runways across a swath of land as big as Manhattan. When completed in a decade, the complex is supposed to transport some 200 million people a year, dwarfing all rivals as the busiest airport on the planet.

But the airport has also become a symbol of a less savory aspect of Turkey’s modern-day incarnation: its reckless disregard for arithmetic and the independence of critical government institutions. Together, they have placed the nation at growing risk of sliding into a financial crisis.

In a global economy increasingly plagued by worries—from an unfolding trade war to higher oil prices—Turkey may present the most immediate cause for alarm. The country’s president, Recep Tayyip Erdogan, who has dominated national life for 15 years, was sworn in again on Monday following a re-election victory that came with extraordinary new powers.

He has wielded his influence to deliver relentless economic growth through unrestrained borrowing, lifting debt levels to alarming heights.

And the additional authority he has been granted is expected to further test the limits of economic reality.

In a conspicuous sign of unease among global investors, the value of Turkey’s currency, the lira, has plunged by roughly one-fifth this year, raising prices for households and businesses alike. It dropped some more on Monday, as Erdogan handed the job of economic chief to his son-in-law, in what markets construed as a sign that he does not intend to adopt a more responsible mode of stewardship anytime soon.

The airport—its first phase is to open in October—has been brought to life with heaps of public money delivered to construction companies closely tied to Erdogan. The government has bestowed upon them guarantees against any losses. If, as many economists expect, the airport proves grander than the flow of passengers, the public will wind up with the bill.

Fears of disaster may seem out of place in an economy that remains one of the fastest growing on earth, expanding by 7.4 percent last year. But that growth has been fed by potentially unsustainable borrowing, both public and private.

The government has been subsidizing vast infrastructure projects like the airport and a $13 billion, 28-mile-long canal linking the Black Sea to the Sea of Marmara. And many businesses have borrowed in foreign currencies, which means their debt burdens have risen as the lira surrenders value.

Major Turkish companies are now trying to persuade banks and other creditors to extend relief, perhaps portending a wave of bankruptcies that could leave financial institutions and taxpayers staring at untold losses. As of the end of April, Turkish private sector companies owed more than $245 billion in foreign debt, or nearly one-third the size of the country’s overall economy.

“That’s a huge number,” said Selva Demiralp, an economist who previously worked at the Federal Reserve bank in Washington and now teaches at Koc University in Istanbul. “And the government is encouraging them to borrow more.”

Staying current on that debt requires that foreign investors continue to entrust funds to Turkey—an increasingly questionable proposition.

Turkey can court money by continuing to lift interest rates, already at 17.75 percent. But

that would depress economic growth and end the festivities for the real estate and construction industries.

Or Turkey can continue the growth party while watching inflation mount as the lira sinks further. That may condemn crucial corporations to insolvency, and perhaps force the government to seek a rescue from the International Monetary Fund, a course that would surely entail painful spending cuts.


Published: 12-07-2018 08:54

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