What’s happening with Turkey’s economic crisis?

Turkey’s economic outlook has deteriorated so much that bankers and traders say Ankara may seek a financial bailout from the International Monetary Fund (IMF) as its currency continues to depreciate, according to a Q&A published by Bloomberg. Turkish President Recep Erdogan may also impose new capital controls to cushion against higher interest rates and stop a further drop in the local currency. Erdogan has so far failed to reassure investors, who worry he will impose his less-orthodox economic views to try and stimulate an already overheating economy.

Q. What’s gone wrong with Turkey’s economy?

A. Turkey enjoyed China-like levels of growth, for much of Erdogan’s almost 16 years in office. Unlike China, Turkey runs one of the world’s largest deficits because its expansion was financed by foreign debt, the Bloomberg report stated.

Turkey injected tens of billion funds received from abroad in construction projects and shopping malls, which drove short-term growth. The country did not focus on improvement of productivity, or output per worker - the main source of long-term economic growth and better living standards.

Q. So how are things looking now?

A. Pretty bad. Inflation exceeded 15 percent, more than triple the central bank’s target. In addition, yields on some government-issued debt are at record highs, amid a continuous fall in the Turkish lira.

This in turn weighs on consumer sentiment and also places corporate balance sheets under more pressure. Companies with foreign currency loans now face a growing burden due to the tanking lira and rising borrowing costs.

Meanwhile, Erdogan aims to maintain low interest rates to finance more construction projects, instead of reducing government debt and hiking policy rates.

Q. Why have bond prices plummeted?

A. Investor concerns led the yield on Turkey’s ten-year bonds to surge to an all-time high, above 20 percent.

In addition, the current-account deficit estimated at over 6 percent of gross domestic product (GDP) this year requires Turkey to attract overseas funding.

The government also needs to control inflation rates, so as to avoid scaring investors away, amid expectations for weak GDP.

Meanwhile, the central’s bank decision to prop up the lira and interest rates by 500 basis point since April hasn’t been enough to keep inflation under control.

Q. Why is the lira so weak?

A. The local currency deterioration was driven by political turmoil after a 2016 failed coup attempt against Erdogan and growing tensions with Europe and the US.

The Turkish administration’s growth-at-all-costs agenda and higher inflation also led to the currency weakness. Remember, in Turkey, more growth means more debt.

Q. Will Turkey need an IMF bailout?

A. Turning to the IMF is unlikely to be accepted by Erdogan, who takes enormous pride in paying off all of Turkey’s debt from a previous rescue package, and who claims the country has finally achieved economic independence.

Turkey is reliant on the outside world as ever, perhaps even more so. If foreign lenders stop rolling over their loans to Turkish banks and companies, the whole economy could grind to a halt in what investors call a “hard landing" scenario.

Accordingly, economists believe that Turkey will eventually seek financial help from the IMF.