A turbulent five days for the Turkish economy has seen the lira hit a record low against the US dollar, sparking fears of a meltdown as Ankara and Washington traded blows over the detention of an American pastor in Turkey.
Although the case of Andrew Brunson, an Christian Evangelical preacher from North Carolina, has been the focus of the deterioration in US-Turkish relations, Turkey’s existing economic woes have merely been exacerbated by the row, according to analysts.
In June, Turkey held elections which were brought forward more than a year largely because of the economic crisis on the horizon.
Earlier this month, President Donald Trump imposed sanctions against two Turkish government ministers and last Friday he doubled the tariffs on steel and aluminium imports from Turkey to 50 and 20 percent respectively, setting off a dramatic slide in the lira.
The lira’s crash, which saw it fall to a record 7.24 to the dollar early on Monday morning before recovering to 6.35 on Tuesday, prompted concerns that the economy, which is heavily reliant on foreign currency loans, could slide into turmoil.
The country also faces a year-on-year credit deficit if $57bn, or 7 percent of Gross Domestic Product (GDP), and growing unemployment.
The crisis in the lira, which has lost 45 percent of its value against the dollar so far this year, increases the cost of corporate debt, which stands at more than $220bn, much of it in the construction industry.
“Turkish banks get loans from the foreign market and sell on the Turkish market so a huge depreciation in the lira puts their balance sheets under pressure,” said Can Selcuki, general manager and partner at Istanbul Economics Research.
“In the private sector, a contract signed two weeks ago based on US currency is now more than 20 percent more expensive due to depreciation.”
With inflation at 15.9 percent in July, the prices of goods in shops have been steadily rising for some time and the lira’s fall threatens even greater increases on basic items.
Melike Turkes, a mother-of-three shopping in central Ankara, said she was worried about how the lira’s fall could affect the cost of her weekly groceries.
“Even basic things like butter and vegetables have increased a lot over the last few months. It’s very worrying when you see the prices go up week by week,” the 46-year-old said.
However, she backed President Recep Tayyip Erdogan’s call for the country to convert gold and dollar savings into lira.
He has portrayed its depreciation as an “attack on our country” and on Tuesday announced a boycott of US electronic goods.
“America and Trump are hurting ordinary [Turkish] people,” Turkes said. “Aren’t we supposed to be friends? Why are they targeting us because of one priest? We should do everything we can to protect ourselves against these attacks.”
Turkey’s strained relationship with the US has reached a low point with the Brunson affair.
He has been detained for nearly two years on charges of supporting the Kurdistan Worker’s Party (PKK), the group said to be behind a coup attempt in 2016 which has waged a four-decade fight against Turkey.
Erol, the manager of an electronics goods store who declined to give his surname, said he was worried the value of the lira and the boycott could damage his business.
“A lot of the goods we sell are imported and we already have problems with the increase in the prices because of the lira’s value against the dollar and euro,” he said. “I don’t see how a boycott will help our economy.”
The Turkish Central Bank has attempted to shore up the lira by promising to provide the necessary liquidity to banks and to maintain financial stability.
Finance Minister Berat Albayrak pledged to outline an economic plan and dismissed rumours that the government could impose capital controls.
However, there was no indication that interest rates would be raised to curb inflation and cool the overheated economy.
Erdogan’s opposition to high interest rates, which he has described as “the mother and father of all evils”, is well documented and the Central Bank’s reluctance to raise the cost of borrowing has led to its independence being questioned.
Meanwhile, two major business groups called for tighter monetary policies, including austerity measures; a plan to cut inflation; and for a diplomatic solution to the rift with the US.
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The chief executive of Isbank, Turkey’s largest bank by assets, suggested interest rates should remain as a tool. “When necessary, all instruments should be used,” Adnan Bali told broadcaster Bloomberg HT. “That doesn’t mean you like it or want it.”
The row over Brunson has compounded Turkish concerns over issues such as US support for PKK-linked Kurdish fighters in Syria as well as Washington’s alarm at Turkish plans to buy a Russian air defence system, which led this week to the US suspending military sales to Turkey.
“We can’t be fighting with everybody and at the same time expect that the economy will correct itself,” Selcuki said. “The tension with the US needs to end.”
He warned that the government should be more open about its plans to continue spending on big projects such as the proposed Istanbul canal while increasing savings, as suggested by Albayrak. “I’m not saying it can’t be done but we need to know how it will be done.”
Meanwhile, one sector has reaped the benefits of the lira’s decline as foreign tourists encouraged by the weak currency have flocked once again to Turkish beaches.
“We expect a $32bn foreign currency inflow,” Firuz Baglikaya, head of the Association of Turkish Travel Agencies, told the state-run Anadolu news agency.
He added that the industry aimed to cut the current account deficit in half this year.