Why Can't Turkey Stop Its Economic Nose-Dive?

Turkey’s currency and economic outlook have deteriorated so much that bankers and traders are starting to talk about the need for an International Monetary Fund rescue -- a taboo topic until recently. Some even worry that President Recep Tayyip Erdogan, who is taking a defiant stand against the U.S. and his country’s creditors, will adopt capital controls as a last-ditch effort to avoid raising interest rates to stop a currency plunge. He has so far failed to reassure investors, who worry Erdogan will impose his less-orthodox economic views to try and stimulate an already overheating economy. U.S. President Donald Trump is adding to the crisis by doubling tariffs on metals imports from Turkey over its jailing of an American pastor on espionage and terrorism-related charges. Trump also has hit Turkey with sanctions -- and is threatening more.

For much of Erdogan’s almost 16 years in office, Turkey enjoyed China-like levels of growth. But unlike China, an exporting powerhouse with a current-account surplus, Turkey runs one of the world’s largest deficits because its expansion was fueled by foreign debt. That all seemed fine when the world’s central banks were pumping cash into markets to help pull economies out of a crisis. But not anymore, as global interest rates rise and investors, less enamored with emerging markets, pull funds back to developed economies. Turkey buried much of the tens of billions it received from abroad in construction projects and shopping malls, which pushed up short-term growth. But that did little to improve productivity, or output per worker, the main source of long-term economic growth and higher living standards.