Turkey’s Currency Crisis Shows the Bumpy Road Ahead
Ali Rıza Güngen 2 October 2018

The last several months have been daunting for the Turkish people and policymakers. As a result of the global financial tightening in 2018, Turkey is suffering from the squeeze of cheap sources of finance. Capital flows to Turkey lost tempo in the spring of 2018 and reversed in August. By the 10th day of the month, people were talking about a Black Friday, in which one US Dollar traded above six Turkish Liras for the first time. The depreciation did not stop there and volatility was unbelievably high for close observers. Concerned citizens witnessed the Lira’s sinking further deep in subsequent days.

The Turkish economy had benefited tremendously from cheap credit in the post-2009 era, but now it seems, the good times are gone.i In the first 8 months of 2018, the Lira lost 41 per cent of its value against the US Dollar and inflation rose to the highest point of the last 15 years. The real effective exchange rate is at its lowest since the 2001 crisis — which remains the biggest financial crisis of Turkish history.ii Business people and economic managers are searching for mechanisms to make people pay for the cost of the currency crisis and hope that authoritarianism of the Erdoğan regime will prove its agility in due course.


End of the State of Emergency… and the State-Sponsored Credit Expansion


It is necessary to situate the current crisis in a broader context: both the spat with the Trump administration and the weakened diplomatic ties are cited among reasons for the Turkish slide. International tensions did in fact serve as a catalyst for the 2018 currency crisis, but the main culprit can be found in the capital accumulation strategies and policy preferences of the last 15 years.

Turkish capital groups and the AKP (Justice and Development Party – Adalet ve Kalkınma Partisi), which came to power in late 2002 benefited tremendously from the lower interest rates and the dollar glut between 2002-07 and 2010-13. Despite the crash in GDP in late 2008 due to the international financial crisis, the policy response in the core countries made it unnecessary to search for a new orientation.

Corporations simply borrowed heavily in USD as the AKP paved the way for this through legal changes in 2009. By May 2013, while the FED declared that its monetary policy would change in the coming years, the Turkish economy’s dependence on capital inflows did not bother the AKP cadres and the heavily indebted corporations. They wanted to dance as long as the music plays.

Despite the FED interest rate hikes, a Turkish bonanza lasted for more than 2 additional years, thanks to the state of emergency and the state-sponsored credit expansion of 2016-18. Following the coup attempt of July 2016, various schemes to provide incentives to the private sector were accompanied by the postponement of the social security premium payments to be made by firms.

The government also made it easier to use export credits and hence provided cheap sources of finance to export oriented firms and launched renewed credit campaigns for the small and medium sized enterprises (SMEs), which provided 3-year loans with no payments in the first year. State expenditure rose rapidly in the months following the coup attempt and the Credit Guarantee Fund (CGF) were used to socialize the financial risks of the SMEs, the motors of employment growth in the Turkish economy.

The CGF is a mechanism through which the government provides guarantees to banks for extending more credit to the SMEs. By way of doing so and also by way of reducing the legal amount to be allocated by banks as provision, the government reduces the cost of providing credit. In case of a credit default, the losses are absorbed by the Treasury, i.e. socialized. In essence, the CGF transfers the risk to the future and amounts to a gamble which can backfire at any moment.

If that happened, it could impose new burdens upon public finances and concentrate risks in the financial sector should the number of defaults increase. Before the constitutional referendum held in April 2017 on the transition to a presidential regime, the AKP government also removed taxes on various consumption goods and expanded the scope of the CGF. The fund’s guarantees amounted to overall 200 billion TL (roughly 47 billion euros) in 2017. The government supported 350,000 firms through the CGF and increased the credit volume in Turkey by 21 per cent in 2017. In sum, the AKP succeeded in providing a stimulus to the economy by state-sponsored credit expansion. The cost was an increased current account deficit and higher inflation rates.iii

A similar strategy was at work in early 2018, but by March 2018 capital inflows deteriorated. In May 2018, the first hike of the USD against Lira was seen. The AKP ended the state of emergency in July 2018; regime change was over and the power of the President was at its height. The problem in mid-summer 2018 was that as its economy still had a current account deficit to GDP ratio at 6,5 percent, double-digit inflation, double-digit unemployment rate and an increasing need to roll over private debt and refinance loans, Turkey became one of the most vulnerable emerging markets, after Argentina.

The global financial tightening put its stamp upon the Turkish currency crisis in August when the end of the state of emergency was accompanied by an end to the state-sponsored credit expansion. Though public banks continued to extend credits, they could not avoid a credit crunch in the same month.

The Turkish economy now faces a bottleneck stemming from these policy choices and the global financial tightening. Resorting to public expenditure may help with a soft landing, but policymakers announced a savings program to satisfy international financiers. Central Bank adjusted the policy rates in September to prevent hyperinflation, but the cuts in expenditure and the higher policy rates will end in a contraction by the last quarter of 2018. It depends on the capital inflows whether this will turn into a full-blown recession by early 2019.


Search for New Sources


The end of the state of emergency does not mean that rule-by-decrees is over in Turkey. On the contrary it has simply changed form from decree by-laws to Presidential decrees and decisions. In one head-spinning move, the President even appointed himself as head of the Turkish Sovereign Wealth Fund (TSWF) – made by a Presidential decision on September 12, 2018 (his signature appears three times).

TSWF was founded in August 2016 with the ambitious target of managing a portfolio valued at 200 billion USD. Its aim was to securitize Turkish non-financial assets held by state corporations. Lacking any surplus traditionally affiliated with the countries that have a sovereign wealth fund, Turkey will derive cash flow by earmarking revenue streams, securitizing real estate and state non-financial assets, and by using state enterprises as collateral to borrow from international financial markets and engage in financial operations in stock exchanges, including the Turkish one.

While their actions were arguably ineffective for the last two years, top policy makers will now use this mammoth institution, but there are suspicions that the financial operations will not pump enough fresh blood to the vessels of Turkish economy. Qatar pledged 15 billion USD in foreign direct investment and policymakers are looking for new sources from China. Pointing out these examples, many pundits treated the currency crisis as one facet of ongoing tensions with the West.

Indeed, these maneuvers themselves were triggered by Turkey’s financial slide and the ensuing credit crunch, not vice versa. Given the 180 billion dollars of private and public sector debt to be paid or rolled over in the next 12 months, more genuflection to the external financiers as well as intermittent courting with the international financial institutions can be expected in the coming months.


When the Fox Preaches…


Erdoğan is now the man in charge and has all the powers he demanded after the transition to the presidential system (actually he had used most of these extensive powers de factosince 2014, if not before). The top level AKP cadres believe that the European countries and the US support Turkey’s foes. To them, The Turkish currency crisis is another front in the ongoing “battle” between Turkey and the “rest of the world”.

This analysis has its mirror image in institutionalist dissidents, since they point out the causes of the crises stemming from lack of an institutional anchor such as IMF for rebalancing the economy or drifting away from the Western bloc. The IMF conditionalities such as budget cuts and labor market interventions to the detriment of laboring classes are portrayed as necessary structural reforms for avoiding the crunch to turn into full-blown crisis.iv

It seems that the economic managers will spend every effort to access new sources of finance while praying for a change in the global financial conditions to the advantage of Turkey and the emerging markets. Political cost of IMF bailout is tremendous and it is not a favorite option for two reasons. Turkey is on the road to local elections, and despite the powers of the President, the regime needs plebiscites for renewing approval.

Losing major municipalities and those regions who are defined as the motors of the economy would undermine the Presidential power. Secondly, the IMF anti-inflationary policy and institutional reform are at odds with the political-economic coalition of social forces behind the Erdoğan rule. Shying away from an IMF deal, the AKP launched its New Economic Program in September 2018. Since it was not enough to satisfy the financial investors demanding an “anchor”, the Minister of Finance and Treasury had to declare that they signed a contract with the McKinsey & Company for consultancy and oversight of rebalancing the economy.

For sure, Turkey is heading towards stagflation and the only way out the impasse is a structural transformation. A public investment and employment program and a progressive tax reform, the two sanctioned items for the neoliberal authoritarianism of the AKP, are desperately needed. Democratization may help Turkish economy in short term, but economic democratization, planning and increase of public share in the economy are needed.

The political ambitions of Turkish authorities to turn the country into a regional and even global power are damaged during first the Syrian war and then the coup attempt of 2016. Today, the credibility of the new presidential system and even the President himself is at stake. Erdoğan and the AKP are trying to walk on thin ice without crashing through. The discontent of the masses will break the waves of the AKP in late 2018 and the laboring masses are well aware that when the fox preaches they should beware of the geese. In other words, when the country is headed towards a crisis and the alleged culprit is internal or external enemies, they refrain from supporting the man in charge so as to save themselves from worse.




Güngen, A. R. (2018) “Financial Inclusion and Policy Making: The Strategy, Campaigns and Microcredit a la Turca”, New Political Economy, 23 (3): 331-347. https://www.tandfonline.com/doi/full/10.1080/13563467.2017.1349091


 For post-2001 trajectory and the restructuring of the banking sector see Marois, T. and A. R. Güngen (2019) “The Neoliberal Restructuring of Banking in Turkey: 2001 to Present”, G. Yalman, T. Marois and A. R. Güngen (eds), The Political Economy of Financial Transformation in Turkey, London: Routledge


 Güngen, A. R. (2018) “Aus der Pfanne herausspringen? Die wirtschaftspolitischen Präferenzen der AKP und ihre Auswirkungen seit dem Putschversuch 2016”, Ataç, İ. et al. (eds.) Anthologie: Nach dem Putsch. 16 Bemerkungen zur “neuen” Türkei, Vienna: Vienna Institute for International Dialogue and Cooperation (VIDC)


 For a critical evaluation of the main camps, see Akçay, Ü. and A. R. Güngen (2018) “Lira’s Downfall is a Symptom: the Political Economy of Turkey’s Crisis”, Critical Macro Finance Blog (August 18, 2018), https://goo.gl/fFUFhp



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