Increasingly dire straits for Turkey

Turkey’s problems are going from bad to worse. Inflation is running at almost 16%, a 15-year high. Faith in the government – already in tatters after President Erdogan appointed his son-in-law as finance minister – has deteriorated further after the US imposed sanctions on two senior government ministers, in protest against Turkey’s detainment of an American pastor over espionage and terrorism charges. This sent the lira tumbling. The currency has fallen by about 28% against the US dollar in the year to date.

Turkey has promised to send officials to Washington “to defuse the rift”, reports Adam Samson in the Financial Times, but markets were “unnerved”, with the yield on ten-year Turkish government debt touching 20%. Turkey’s large current-account deficit (which leaves the economy dependent on overseas funding) means it is vulnerable to capital flight, which tends to be self-fulfilling. The cost to insure Turkish debt against default is at its highest since 2009, notes the FT.

It’s hard to say how this will play out, says William Jackson on Capital Economics. Erdogan opposes raising interest rates, yet the scale of the fall suggests the central bank may be allowed to intervene soon to prevent any further collapse. The Turkish stockmarket is now down 40% this year in dollar terms, notes Reuters, second only to Venezuela as the worst-performing of 30 emerging markets. We wouldn’t see this as a buying opportunity yet.