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Will Turkey turmoil turn into contagion?


THE pertinent and unanswerable question about Turkey is whether the country's present economic turmoil is an isolated event, mostly confined to Turkey itself, or whether it portends a larger economic convulsion that shakes markets around the world. Among economists and other experts, there Is no consensus. Some foresee contagion: Turkey's problems will spread. Others envision a one-country economic blip.

Which is it? The answer obviously matters. The global economy already faces obstacles to growth. American interest rates are rising, as the Federal Reserve tries to prevent higher inflation. President Donald Trump's trade wars are threatening. If we now add a slowdown of "emerging market" economies (China, Brazil and similar "middle-income" nations), the global expansion might sputter or halt.

Turkey's experience is relevant. In recent months, its currency (the lira) has collapsed. At the start of 2018, it was trading at roughly four lira to the US dollar; now it is about six lira to the US dollar.

This makes it harder for Turkish businesses and consumers to repay debts, which - more than in many other countries - are often made in US dollars. To repay these debts, Turkish companies need to earn more lira, which can be sold for US dollars. The more lira go to repay US dollar debts, the fewer lira are left over to buy other things. Economic growth slows. If debtors cannot raise the US dollars to repay their loans, they default. Too many defaults, and growth stops.

Turkey's debt problems are undeniably daunting, noted economist Hung Tran of the Institute of International Finance (IIF), an industry research and advocacy group. Consider: Between now and the end of 2018, Turkey faces debt repayments - principal and interest - of about US$120 billion; in 2019, the total is about US$200 billion. By comparison, Turkey's economy (gross domestic product or GDP) is about US$850 billion. Some of these loans could be rolled over; how many is unclear.

Many debts were incurred by banks or private firms, encouraged by easy-money policies. The government pumped up the economy in the wake of a failed military coup in 2016 and in anticipation of a new election. The election was held in June 2018 and was won by President Recep Tayyip Erdogan. He was surely helped by the economic stimulus. Last year, Turkey's GDP grew 7 per cent, up from 3.2 per cent in 2016.

To complicate matters further, Turkey and the Trump administration are feuding over the Turks' detention of Andrew Brunson, an American pastor accused of anti-state activities.

Now comes the reckoning. Many observers believe that what happened in Turkey will stay in Turkey. Its economy is simply too small (about 1.4 per cent of global GDP, according to some estimates) to influence the rest of the world. "It's mainly a Turkish issue," said economist Fred Bergsten of the Peterson Institute. He does not expect large spillover effects - say, a slowdown of growth in Europe or capital flight from other "emerging market" countries, such as Brazil or India.

Not all economists are so hopeful. Writing in political website The Hill, Desmond Lachman of the American Enterprise Institute predicts that "Turkey will default on its debt and impose capital controls". (Capital controls are legal restrictions on money movements in and out of a country.) He expects contagion - capital flight from heavily indebted countries - that will weaken the global recovery and hurt the US economy.

Mr Tran of the IIF thinks that emerging market countries that have problems similar to Turkey's - poor policies, maturing debts, sizable current account deficits - are the most vulnerable to capital flight. These include South Africa, Indonesia and Egypt. So far, the evidence is reassuring - the IIF's most recent survey of capital movements did not detect any sizable money surges since the lira's latest large drop.

Crowd psychology could trigger a panic. If investors expect other investors to sell, there could be a stampede for the door.

This story is not over yet. What is uncontroversial, at least among many economists, is that Turkey will need to go to the International Monetary Fund (IMF) to end the present crisis. The IMF would provide a hefty loan (it is doubtful that anyone else would) and impose "tough austerity policies" designed to improve the economy's performance, said Jacob Funk Kirkegaard of the Peterson Institute.

By their nature, these policies would be unpopular, especially with Mr Erdogan, because they "could weaken hold on power", as Mr Kirkegaard put it. It seems likely that he would resent and resist them as long as possible. That could change everything. Stay tuned. THE WASHINGTON POST WRITERS GROUP