President Erdogan has demonstrated in recent days that he is always good for a negative surprise. With the unexpected dismissal of central bank chairman Cetinkaya and the announcement that the central bank would be completely restructured, the head of state has made it clear that in future he regards monetary policy as part of his economic policy. And as if the frontal attack on central bank independence weren’t bad enough, the diplomatic conflict with the USA over the purchase of a Russian air defence system is escalating.
Independence of the central bank in danger, political quarrels between Ankara and Washington – the parallels with the drivers of last year’s lira crisis are obvious. Nevertheless, the reaction on the financial markets has so far remained very subdued. There are no clear signs of an existing or expected crisis in Turkey. The fact that this picture can change rapidly is mainly due to the short-term foreign debt of the Turkish economy. This currently amounts to around USD 120 billion and thus significantly exceeds the existing currency reserves. Moreover, Turkey does not have a significant, let alone structural, current account surplus. Consequently, the country is dependent on a sustained and steady inflow of foreign capital. A permanent turning away of international investors therefore carries the risk of triggering a balance of payments crisis with corresponding negative consequences for the country’s currency and economy. Even a significant devaluation of the lira and a renewed rise in inflation rates would noticeably worsen the country’s unstable economy (DZ BANK forecast currently: -1.0% for 2019 and +0.5% in 2020) and cause a deep recession.
A crisis the scale of last year can repeat itself at any time in view of the current framework conditions – with or without tangible triggers. In particular, the events surrounding central bank independence and the diplomatic conflict with the USA must be kept in mind. However, a new crisis is not a foregone conclusion. After all, in recent years President Erdogan has responded to very high political and financial market pressures sooner or later by making concessions on key adjustments.