Oh no, it’s Thanksgiving Day!

By Dominic Seah Yong Ming

Turkey, the country that connects the Middle East to Europe, consists of a cultural hotchpotch of 81 million people [1]. During its recent general election that was held on 24 June 2018, Recep Tayyip Erdoğan (Erdoğan) managed to get re-elected and retained his position as the president of the country after amassing 52.5% of the votes, with the AK Party (Justice and Development Party) being the ruling party [2].

Hallelujah – The next ”Asian Financial Crisis”

The Turkish speaking country has come a long way since its first coup d’état in 1960 and its second in 1971, the third in 1980 and the fourth in 1997 [3]. They say that history repeats itself and it

certainly did in Turkey when a coup d’état was attempted, again, on 15 July 2016 when a section of the military troops executed a coordinated operation in several cities and tried to topple the government, resulting in 241 people killed and 2,194 injured [4]. During the coup d’état, an American pastor named Andrew Brunson was arrested after being accused of being involved with the Gülen movement which is regarded as a terrorist organization by the government. Coupled with the dispute over the Syrian city of Manbij earlier this year [5], the relationship of Turkey with the U.S. has become severely strained. In response to the arrest, the U.S President Donald Trump has requested the pastor to be released immediately and has threatened to impose trade sanctions on its NATO ally in the event of noncompliance. In fact, just last week, the U.S announced plans to hike tariffs on Turkish steel and aluminium to 50% and 20% respectively.


Source: Tradingview


Upon the news of the sanctions, the Turkish Lira (TRY) fell by 22.4% before reaching a highest record ever of 7.2173 USD/TRY, then slightly sliding back to 6.4865 at 14 August 2018. On top of that, Turkey’s stock market BIST100 crashed from 97,468.58 to its 17 month low of 89,215.398 before recovering to 94,356.37[6]. At the same time, government borrowing costs have increased to 18% a year [7] and inflation has spiked to its 14-year high of 15.85% [8]. Several economists have deduced that it is probable that what happens in Turkey is contagious and will affect the neighbouring


European countries due to its close proximity. As the 5th largest trading partner of Turkey [9], Italy is certainly first to be on the investors’ watch lists, given its high debt level and political issues. On the other hand, a news analysis from Berenberg Bank state that Turkey’s annual GDP is only equivalent

to about 6.5% of Eurozone’s GDP and a fall of 20% in Eurozone exports would subtract no more than

0.1 percentage points from growth in the Eurozone [10] which is insignificant.


“Fish”ing for a solution? Maybe not.


The Central Bank has kept interest rates on hold despite soaring inflation and tumbling currency exchange rates as the President slams interest rates as “a tool for exploitation”. Central Banks are known to raise interest rates in the face of weakening currency in order to attract foreign

investments while increasing the demand for domestic currency. Thus, the monetary policy begs the golden question – is it really beneficial for the economy and, by extension, the people ? According to a Bloomberg economist named Noah Smith, this economic school of thought has been dubbed Neo- Fisherism [11].

As we all know, the Fisher effect reveals a positive relationship between the nominal interest rate and inflation. The conventional macroeconomists have interpreted it as involving causation running from inflation to the nominal interest rates (higher inflation/inflation expectations will cause nominal interest rates to rise and vice versa). However, Neo-Fisherism states that the causation, actually, runs in the other way, from nominal interest rates to inflation instead (higher interest rates lead to higher inflation rate in the long run since real interest rate is unaffected). Therefore, adopting a Neo-Fisherism school of thought will imply that Central banks in a developed country can decrease inflation by decreasing their nominal interest rate targets and not by raising rates as per orthodox monetarism would have it. Without a doubt, there have been a lot of controversial ideas about the move made by Turkey’s Central Bank. Bulent Gultekin, an associate professor of finance at the Wharton Business School and former governor of Turkey’s Central Bank, criticised the use of such an unconventional model by saying the invocation of Neo-Fisherism is a “smokescreen with no economic validity” and that the situation in Turkey’s developing economy has no use for it [12].


Source: Federal Reserve Bank of ST.Louis [13]


Prisoner’s Dilemma


Turkey is currently in a tricky situation and must decide between standing firm on their ground and defying the U.S.’s orders or accepting the U.S.’s request and releasing the pastor. If Turkey decides not to release the pastor, the U.S is likely to impose further sanctions on Turkey which will have a huge impact on its rising debt levels [14] and its debt repayments. In addition, investors are likely to pull out funds from the country thus steepening the currency woes as they sell their investments in Turkish Lira. On the other hand, if Turkey releases the pastor it will lose its bargaining chip for the extradition of Fethullah Gülen, a Turkish-US based cleric who is the prime suspect behind the Gülen movement.


Moving forward, Turkey will probably just wait it out until the panic is over and it is just a matter of who (US or Turkey) blinks first. In the meanwhile, I’d say it is a good time to pay a visit to Turkey on a holiday now.






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