Turkey is sliding ever deeper into economic crisis, as foreign and domestic investors are losing confidence in its solvency and running for the exits. The Turkish lira is now the world’s worst performing currency in 2018, dropping more than 40 percent against the US dollar. The country’s 10-year interest rates are now twice the level of neighboring Greece, an economic basket case only a few years ago.
These developments are all driving Turkey to all but inevitably approach the International Monetary Fund (IMF) for its second bailout in the 21st century. Unfortunately for the government of President Recep Tayyip Erdoğan, however, Turkey is more isolated internationally than at any moment in recent decades. Erdogan’s megalomania combined with his reckless economic policies have antagonized all of the country’s potentially deep-pocketed friends at this hour of maximum need. The IMF will find it difficult to help Turkey without demanding tough austerity policies in return—policies that could weaken Erdogan’s hold on power.
The scale of a new bailout depends on the depth of the crisis. To put the potential size into perspective: The IMF recently committed $50 billion to Argentina, a country with many of the same economic problems as Turkey but just three quarters its size.
Turkey’s Economic Woes
Although Erdogan’s recent policies have angered the Trump administration, Turkey’s basic difficulties derive from the twin deficits it has been running in recent years. The current account deficit rose from 3.8 percent of GDP in 2016 to 5.5. percent in 2017, and the government’s cyclically-adjusted primary balance—the structural budget deficit without interest payments—deteriorated by more than one percentage point over the same period.
These are dangerous economic trends for a capital-importing country in a global financial system squeezed by increases in US interest rates and facing the prospect of increasing interest rates in the euro area and Japan. Turkey also has low foreign exchange reserves at just $74 billion, or 8.7 percent of GDP, and foreign debts of $180 billion of mostly private corporate sector debts maturing in less than one year. Meanwhile, the contingent liabilities of the Turkish government have continued to rise. These come from increasing state guarantees of private debts, lending by state-owned banks, and the existence of large amounts of government-backed public-private-partnership (PPPs) initiatives in the Turkish economy.
Even the most politically stable and technocratically competent government would likely struggle with managing these deteriorating fundamentals. But Turkey’s malodorous reputation also results from its divisive political transition from a parliamentary system to an executive-led presidential system under Erdogan, who appointed his son-in-law as finance minister amid widespread criticism that he lacked qualifications for the job.
In his state of near panic, Erdogan has taken a leaf from South Korea’s dubious practice in 1997 at the height of the East Asian financial crisis—appealing to his countrymen to convert their foreign exchange and gold possessions to support their local currency. Of course, Erdogan has also been handed a short-term political gift by President Donald Trump, as his gloating tweet about Turkey’s problems will allow Erdogan to blame all Turkey’s economic problems on US bullying—a playbook used for many years by Cuba’s Fidel Castro and now also by Venezuelan president Nicolás Maduro.
Turkey’s Troubled Political Alliances
Making Turkey’s problems worse are a range of political difficulties relating to its relationship with NATO, the European Union, and the United States.
Turkey’s long-standing alliance in NATO with the United States is under strain because of clashes over the possible Iran sanctions-busting activities of state-owned Turkish Halkbank, as well as Turkish opposition to US military support to Kurdish forces in Syria. More recently there has been the ugly spat over US clergymen arrested in Turkey in what seems to be Turkey’s desire to set up a “prisoner swap” with a Turkish banker held in the United States as well as the Turkish opposition leader Fethullah Gülen. The latter fled to the United States several years ago and has been accused by Erdogan of masterminding the recent coup attempt against him. Given Trump’s low attachment to NATO, Washington is hardly like to offer bilateral aid to Turkey or push for a lenient IMF program to Ankara.
Turkey’s political relationship with the European Union is also at best unsteady. Europe and Turkey have repeatedly clashed in recent years, and Europeans have criticized Erdogan’s crackdown on the Turkish press. On the other hand, the deal struck between the European Union and Turkey in 2016, under which the European Union provides billions of euros in economic assistance to Turkey in exchange for Turkey preventing large-scale migration through its borders into Europe—“border control for cash,” as it is called—remains mutually beneficial to both parties. But the European Union is not likely to assist Turkey financially without the direct IMF involvement.
Under Erdogan, Turkey has sought to improve friendships in the Middle East to replace its frayed relations with Europe and the United States. But that effort has been complicated by Turkey’s commitment politically, economically, and militarily to Qatar in its dispute with Saudi Arabia and other Gulf neighbors. Though rich, Qatar is under a regional economic embargo and already has significant economic exposures to Turkey; the country is unlikely to be willing or able to provide a bailout of the magnitude that Turkey may need. Were Turkey to reverse course and break relations with Qatar, it could seek a rescue from Saudi Arabia and its rich regional allies. But that switch seems unlikely.
Then there is Russia, with which Turkey has frequently clashed over policies in Syria. President Vladimir Putin would love to exploit any opportunity to split NATO by helping Turkey. In his recent op-ed in the New York Times, Erdogan warned America that Turkey might have to seek new friends. But Russia’s own economic situation would prevent it from providing what Turkey requires. And Putin’s likely political ask—a Turkish withdrawal or at least estrangement from NATO—would be very risky for Turkey.
Finally, Turkey could conceivably turn to China. But Beijing has little strategic interest in helping out Turkey, either economically or politically, especially because Erdogan has repeatedly spoken out in favor of China’s Uighur minority, ethnic brethren of Turks.
Turkey’s Only Realistic Hope Is the IMF
Because of all these factors, all roads lead to the IMF. But the Fund is bound to impose the kind of tough economic conditionality that a “repeat IMF customer” would warrant. Moreover, because the IMF has helped rescue neighboring Greece, political fairness concerns will loom in the background. The Fund also has other current and potential program countries to worry about. It is hence politically inconceivable that Turkey will receive anything other than the standard IMF program conditionality.
President Erdogan does have some potential if unsavory political leverage, however. A seemingly imminent Syrian government attack on the rebel-held Idlib province, just south of the Turkish border, could easily unleash another refugee emergency inside Northern Syria. The Turkish-Syrian border is now guarded by an actual border wall, something that did not exist in 2016. Turkey’s decision whether or not to open its borders and again provide refuge for Syrians could well be political in nature, possibly contingent on economic aid from the West or the terms of an IMF rescue package. Turkey’s economic crisis risks—yet again—making Syrian refugees pawns in a greater regional power game.