Is Turkey on the Verge of Economic Collapse?

  • There are only few options for the development of the current economic situation in Turkey.
  • Turkey has been relying largely on the tourism industry, shut down by the Coronavirus.
  • Argentina's default would mean that Turkey could be next.

Turkey continues to experience tumultuous economic times. Turkish President Recep Tayyip Erdoğan has been grandstanding on the world stage without having the funds to back such actions long term. Turkey took on the Syrian and Libyan conflicts. The reasoning is personal ambitions for Erdogan to restore the Ottoman Empire.

Recep Tayyip Erdoğan is a Turkish politician serving as the 12th and current President of Turkey since 2014. He previously served as Prime Minister from 2003 to 2014 and as Mayor of Istanbul from 1994 to 1998.

It was among the bloodiest empires in history. Additionally, Erdogan turned Hagia Sophia into a mosque, which caused an uproar around the world. Russia decided to build a replica of Hagia Sophia in Syria. At present, the Kremlin does not plan to attack Turkey and retaliate for its actions. Sadly, Turkey remains part of NATO.

There are only few options for the development of the current economic situation in Turkey. One of the options is for Turkey to gain financial support to be able to deal with the capital outflow, whilst stopping the dollarization of the economy. Otherwise, it will face a set of sharp devaluation of the Lira, inflation, and probably a state default.

Additionally, Turkey has been relying largely on the tourism industry. To note, a majority of the tourists in Turkey are from the former Soviet bloc. Given the coronavirus pandemic, the industry is almost obsolete.

Moreover, Erdogan fired the head of the Turkish Central Bank last year. The President dismissed the head of the Central Bank for conducting the wrong monetary policy, according to the President, and in his opinion, it should have been done differently. But what does Erdogan know, outside his own ambitions?

Turkey has been trying for some time to join the European Union. Thus far, it has not been successful, and the latest development in the series of conflicts made it impossible., The conflict with Greece upset France. The Libya and Syria situation caused deterioration of the international relations with myriad nations.

The Central Bank of the Republic of Turkey, CBRT, is the central bank of Turkey. Its responsibilities include conducting monetary and exchange rate policy, managing international reserves of Turkey, as well as printing and issuing banknotes, and establishing, maintaining and regulating payment systems in the country.

Turkey has long been a recipient of European capital, which came to this country, taking advantage of the logistical proximity and low cost of labor. This capital was converted into production, relatively inexpensive products which entered the European markets, having won their niches there. Turkey exported a lot of cheap labor to Germany as well.

The analysis of the statistical data shows that Turkey is in debt over $400 billion. The costs of servicing the debt increased significantly. According to the Global Risk report, Turkey was right after Argentina with the risk to collapse. Hence, Argentina’s default would mean that Turkey could be next.

Overall, given Erdogan’s personal ambitions, and complete disregard for the domestic issues, it is quite possible that Turkey will default soon. Instead of the grandiose plans and ambitions, Turkey will go in the downward spiral. Erdogan already faces staunch criticism from the opposition pertaining to involvement in the Syrian conflict.

Turkey’s economy may fail by the end of this year. Erdogan should be focusing on the domestic economy, instead he chooses to play geopolitical games. Yet, he does not have enough financial means to be victorious.  Erdogan will not last in power long term.

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Christina Kitova

I spent most of my professional life in finance, insurance risk management litigation.

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