A new research claims that a severe credit crunch is staring at the face of the Turkish economy in addition to the country’s currency woes.
A recent report from the Washington D.C.-based Institute of International Finance (IIF) claims that the local economy of Turkey is likely to be crushed because of a credit crunch due to investors leaving the economy.
The trade deficit of the country has until recently been made up by foreign investments. But investment by those investors suddenly slowed down significantly earlier this month. the report claimed that the investors have begun to take their money away from the Turkish economy instead.
The report further claims that this will result in a credit crunch for the local economy to a degree that would be worse than the previous one that took place in 2008. That crisis had temporarily brought most of the international economy to a halt.
Last year, Turkey saw a sudden and huge increase in credit that helped the economy to grow and attract foreign investors. But now that has changed.
“Last year’s credit boom has gone into reverse,” the IIF report states.
This would translate into a slow down for the once booming economy with double digit growth.
That would be bad for local businesses.
One of the major lessons from the 2008-09 financial crisis was that global business coming to a halt because of a hurdle in free-flowing credit which was followed by economies going into recession. That is exactly what happened in both developed and developing or not so rich economies.
There is already an anticipation among the stock market of a slowdown in Turkey. In the last one year, there has been a drop of over 50 per cent in the iShares MSCI Turkey exchange-traded fund (TUR), which tracks a basket on Turkish stocks. In comparison, there has been an 18 per cent rise in the S&P 500 in the same period. Both figures exclude dividends. Investors in stock typically take into consideration the condition of the economy 9-12 months in advance.
The situation for Turkey however can get worse instead of getting better because of the lack of understanding of economic realities by Turkey’s president Recep Tayipp Erdogan, claim critics. While the economists argue that lower interest results in inflation, Erdogan believes that reverse is true.
Investors are not very sure of the policies that the president would propose in the future and hence the huge uncertainty.
However, there is a single lining in all this. According to the IIF report, the recent fall in the value of the Turkish lira could help the country to offset some of the trade deficit. The report also claims that the low currency could even result in the economy turning the trade deficit into a trade surplus without the need for foreign investments. But the real blow would be to the local economy, the report states.
(Adapted from Forbes.com)