Turkey’s Losing Economic War

Harun Macit is one of the lucky few in Turkey. He builds sports facilities and sells equipment overseas, earning hard currency to comfortably pay his foreign loans. Other companies, with revenue and assets held mainly in the local currency, have watched their debt loads mushroom as the Turkish lira’s value has fallen by almost a third this month alone.

The lira’s meltdown has eroded banks’ capital and threatens a wave of bankruptcies. The crisis has spread beyond Turkey, infecting other emerging markets and dragging down stocks in London and New York. And it has poisoned Ankara’s relationship with Washington, which it blames for fomenting the chaos in an “underhanded plot,” as Turkish President Recep Tayyip Erdogan has called it, to bring the country to heel.

The roots of the lira’s collapse, however, lie in the policies of the country’s strongman president, who has run his economy hot to curry popular support and win nine votes in as many years. Thanks to a frenzy of building by companies close to the government, Turkey’s $880 billion economy has expanded at an average annual rate of 6.8 percent this decade.

“It was obvious this would implode. I have been telling my friends in the construction business for years to stop competing with each other, that there is a world out there to build in,” said Macit, age 53, at his family-owned company in Istanbul’s Bagcilar suburb, the name of which means “grape growers,” a nod to the past when the area was rolling farmland. Today, a dozen apartment blocks frame the view from Macit’s boardroom. In them are some of the estimated 800,000 unsold new homes developers say have flooded the Turkish market.

The building boom has transformed Istanbul’s historic skyline into a sprawling construction site. New mosques, bridges, roads, and shopping malls have fed a construction industry that accounts for almost 10 percent of gross domestic product. Since 2001, imports of building materials and other goods have chronically outstripped Turkish exports, and the current account deficit (which counts net trade, income from abroad, and current transfers) ballooned to $50.2 billion. Debt piled up elsewhere in the economy, too; the government, banks, factories, restauranteurs, and homeowners all binged on cheap credit from abroad—to the tune of $460 billion, more than half of Turkey’s GDP.

Now, some of the debt-holders are doomed to fail. “We know some companies are insolvent and some are just illiquid, but we don’t know which ones, and until we do they will all be burned,” Refet Gurkaynak, an economist at Bilkent University in Ankara, told me. He sees parallels with the United States’ subprime mortgage crisis in 2007. “We already see that credit has frozen and banks are not lending.”

Business, too, is grinding to a halt. Some businessowners are complaining that a few food products have stopped being delivered, and of producers who demand cash up front for orders. Meanwhile, half a dozen power plants were offline last week as the lira’s plunge drove up the cost of natural gas.

After four other financial crises since the 1990s, Turkey’s business community is accustomed to such “convulsions,” Macit said. Perhaps that is why, this time, he was prepared.

Macit, a practicing Muslim, wears a tailored suit without a tie and keeps his beard neatly trimmed. His office is decorated with Ottoman memorabilia and his conversation is peppered with anecdotes about the sultans. He has avoided drawing interest off his euro holdings, in compliance with Islamic tenets, and he has kept foreign-currency loans below 20 percent of his company’s capital. That is despite the fact that his firm, Reform Group, builds turnkey stadiums and ships artificial turf and surfacing for tennis courts and running tracks overseas; in such a business, he could have easily accessed much more foreign credit.

Unfortunately for Macit and others, though, this is no ordinary emerging-market crisis. It is compounded by a nasty split between Turkey and its NATO ally, the United States, over a host of disputes ranging from policy in Syria to delays in U.S. weapons sales to looming penalties on a Turkish state bank that helped Iran skirt sanctions.

Simmering tensions boiled over when Turkey refused to free Andrew Brunson, a 50-year-old evangelical preacher from North Carolina who has been held for nearly two years on terrorism charges, despite President Donald Trump’s demands he be let go.

In turn, Trump turned to some of his favorite foreign-policy tools to pressure Turkey: tariffs on metal imports and sanctions on members of Erdogan’s cabinet for their role in detaining Brunson. Although the restrictions are not ruinous, they did send the lira into a tailspin. It plunged 17 percent in one day alone, and investors fear U.S. Treasury Secretary Steven Mnuchin’s warnings about more punitive measures to come.

Trump’s salvos have allowed Erdogan to cast the currency crisis as an “economic war” launched by Washington. He has urged ordinary Turks to mobilize by converting their nest eggs from dollars or euros into lira to shore up the currency, and he has introduced retaliatory tariffs on some U.S. imports and called for a boycott of Apple products. Both the president’s supporters and critics do seem to see some evidence of U.S. malfeasance. Perhaps that is why many have responded to his calls by filming themselves chopping up dollar bills, dumping Coca-Cola down their toilets, and smashing or shooting iPhones. On the more extreme end, on Monday, gunmen opened fire on the U.S. Embassy in Ankara. No one was hurt in the attack, and two men were detained. Erdogan’s advisor, Ibrahim Kalin, quickly condemned it, calling it “an attempt to create chaos.”

Meanwhile, to minimize U.S. leverage over Turkey, Erdogan has sought to mend fences with Germany and France, whom Kalin said expressed solidarity against Trump’s trade and sanctions policies. Qatar pledged $15 billion in investment to help Turkey get through the crunch. But the market has not been convinced. On Aug. 17, the ratings agencies Moody’s and S&P pushed Turkish debt deeper into junk territory. Now it is on par with Argentina and Greece. “The absence of an orthodox monetary policy response to the lira’s fall and the rhetoric of the Turkish authorities have increased the difficulty of restoring economic stability,” a third ratings agency, Fitch, said. It had downgraded Turkey last month.

Economists are skeptical of the Turkish government’s claims that their country’s economic woes trace back to the United States. “When you refuse to acknowledge there are real problems … if you are only talking about financial markets or the Trump administration acting maliciously, it will not fly,” said Gurkaynak. “People will no longer believe things are going to be fine when these firms building in the middle of nowhere are unable to sell them and their debts don’t just go away.”

And in fact, the war of words with Trump has only exacerbated a sell-off of Turkish assets that was already underway. The lira began its latest tumble last month on the day Erdogan took office as Turkey’s newly supercharged president, when constitutional changes he devised went into effect. He named Berat Albayrak, his largely untested 40-year-old son-in-law, as finance minister. It was a clear message that Erdogan intended to exert even more control over the central bank, which he has already pressured to keep interest rates artificially low despite double-digit inflation.

A devout Muslim, Erdogan has fumed against interest rates as the “mother of all evil,” endorsing an alternative economic theory that high interest rates fuel inflation. His theory also apparently advises against criticism: During Erdogan’s years-long consolidation of power, he has shed market-friendly ministers, tamed a garrulous press, and appointed university rectors, police chiefs, and even directors to the state theater company. Following a bungled 2016 military coup, Erdogan seized assets worth $11 billion belonging to companies affiliated with Fethullah Gulen, a Muslim cleric living in Pennsylvania whom Turkey blames for the coup attempt. More than 50,000 people have been jailed, and the ranks of the civil and security services have been emptied of 150,000 people, eroding key state institutions. Most recently, authorities have also opened criminal probes of social media users and anyone else perpetuating “fake news” to silence criticism of government policies.

None of this is good for Turkey’s economy. “There are people in the bureaucracy now that make you wonder how they got through the door. Erdogan doesn’t have good advisors but a bunch of sycophantic yes-men,” Wolfango Piccoli, the co-president of the consultancy Teneo Intelligence and has covered Turkey for two decades, told me. “The purges, the early retirements, appointments of loyalists mean the political and bureaucratic system is not up for the job, especially when you need to convince the single decision-maker about painful choices.”

Macit, the builder, sees the crisis as a long-overdue chance to reorient Turkey away from the United States. “America is a threat to world peace, and we would benefit from severing ties. Our most important markets are in Europe and the Middle East, not 10,000 km away in the U.S.,” he said. “From banks to companies to citizens, the resistance is united. We know there will be more attacks, but everyone is in position; they won’t abandon the trenches, and this country will not surrender.”

That resistance will come at a price, whether in the form of vast payments on corporate debt or just high prices for groceries at the market. But to most Turks, Erdogan’s defiance in the face U.S. bullying has been heroic, and for that they are willing to pay.