There’s a storm brewing in Turkey. The lira has plummeted over 50 percent on the dollar in the past 12 months, and it’s likely that the situation will get much worse before it gets better. But it’s not just Turkey feeling the heat. The crisis is being felt all over the globe, and while emerging economies have been hit the hardest, it could soon begin to take its toll on some of the world’s largest financial players.
What caused the lira to crash?
Over the past several years, Turkey has showed significant growth, even rivaling that of China and India. In the first quarter of 2018 alone, Turkey surpassed analysts’ expectations, posting a 7.4 percent leap in GDP. The problem, however, is that most of this could be attributed to its affair with foreign debt. Specifically, USD-denominated debt.
Banks and corporations made good use of the debt, sparking a surge in consumer spending and consumption, but increasing geopolitical tensions. Turkey’s lack of USD reserves is beginning to catch up. The International Monetary Fund (IMF) has even forecasted that the country’s GDP to debt ratio is poised to reach a staggering 50 percent in the coming months.
Despite the numbers, however, the country’s leader, Tayyip Erdogan, claims that Turkey is a victim of a global economic attack, stating “The aim of the operation is to make Turkey surrender in all areas, from finance to politics. We are once again facing a political, underhand plot. With God’s permission we will overcome this.”
Erdogan also encouraged Turkish citizens to ditch the dollar and euro in favor of the lira, saying “My brothers who have dollars or euros under their pillows: Go and convert your money into lira. We will thwart this game together.”
Capital controls and capital flight
As the crisis continues to spiral out of control, analysts are predicting that Turkey could begin to implement strict capital controls to help support the lira, measures which could place extra taxes or forbid outright the withdrawal or transfer of significant amounts of cash. A move which Goldman Sachs’ co-head of emerging markets and foreign exchange research, Kamakshya Trivedi, says might not be the answer: “Full-blown capital controls that everybody is worried about I think have a pretty limited chance of success, partly because they have a big external funding requirement.”
Though the country’s leadership suggests such measures are not yet on the table, Turkish citizens are already beginning to move their wealth into safer mediums, with gold and bitcoin purchases skyrocketing in recent months.
Gold trading volumes alone have doubled on the Borsa Istanbul, with the price of the precious metal trading at a premium compared to other major hubs such as New York or London.
Bitcoin, for its part, has seen trading volumes surge by 350 percent on the country’s biggest exchange, BtcTurk. And though the price of both bitcoin and gold have plummeted this year, citizens holding either are still seeing gains against the lira.
Though Turkey may still be far from ‘hyperbitcoinization,’ the increased volumes and interest in the cryptocurrency are reflected among other emerging economies with struggling currencies.
The global perspective
Turkey’s lira crash has sparked fears worldwide of contagion, or the spread of these crises to other emerging economies caused by the sell-off of assets in these economies.
Already, the fear is impacting others, with currencies such as Indonesia’s rupiah and India’s rupee taking a beating as well. But some analysts are even predicting trouble for Turkey’s top trade partners, specifically China and Germany, and with the U.S. dollar continuing to climb, the impact of Turkey’s troubles on the euro on yuan could be disastrous.
Joining the Turkish lira in the emerging market chaos are the Argentinian peso and the South African rand, with both countries facing economic troubles of their own. While no one is suggesting that these currencies are going the way of the Venezuelan bolivar just yet, concern is growing, and citizens are scrambling to secure their wealth, particularly in South America.
As pressure mounts on emerging markets and the global trade war intensifies, bitcoin and gold promise to help citizens hedge against their countries economic troubles, a trend that could soon extend to some of the world’s strongest financial players if these financial woes are not quelled.
Image from Public Domain Pictures.