Turkish turbulence

Events in Turkey last week underscored the importance of responsible and far-sighted governance rather than political expedience and posturing. The Turkish lira took another beating on the back of fears stoked by a $10 billon dollar fall in international reserves in the first three weeks of March. The attempts of foreign investors to close out their positions resulted in the central bank taking extraordinary measures to restrict lira liquidity and angry accusations from the government about foreign manipulation of the currency market.

All of this came just ahead of crucial municipal elections in the country that threaten to undermine President Erdogan. An economy in recession and a collapsing currency do not reflect well on his government who have so far maintained a firm grip on the Turkish electorate through populist policies designed to produce unsustainable levels of economic growth.

The confidence of foreign investors will have been badly shaken by the reaction of the Turkish government last week to a potential run on the currency and may take some time to return. This, combined with monetary and fiscal tightening measure that are likely to result in further economic contraction, presage an inevitable an extended period of turbulence for the Turkish economy. The question is what impact a deepening Turkish crisis will have on an already jittery global economy.

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