Turkey’s Shaky Economy: a Local or Global Concern?

Turkey’s failed coup looks set to deliver a substantial blow to Turkey’s already wobbly economy. It could also renew concerns, post Brexit, about global emerging markets more broadly.

Late Friday, following initial reports that a coup was underway, the Turkish lira fell almost 5 percent, its steepest daily fall since 2008.  A broader sell-off seems likely on Monday, on the back of raised political uncertainty.  (My colleague, Steven Cook, puts the coup attempt in historical perspective here.) But economics also play a role here. With the growth outlook weakening recently, despite accommodative fiscal and monetary policy, and in the face of widening fiscal and external deficits, this weekend’s events are likely to contribute to a prolonged period of economic uncertainty. Notably:

The constructive story about the Turkish economy has long been anchored around greater integration in the global economy, and specifically strengthened trade and financial ties with Europe. Such hopes--including the anchor provided by the ambition of eventual EU membership--already were being called into question following the Brexit vote, and any effort by the Turkish government in the aftermath of the coup to extend government authority or adopt more nationalistic economic policies likely would further dampen interest in the west in strengthening economic ties.

More broadly, as I have noted previously, emerging markets have held up impressively in the aftermath of the Brexit vote last month. (Notably, Turkish stocks were up 15 percent this year prior to Friday’s events.) Firm expectations that U.S. interest rates will stay low, as well as evidence that stimulus measures in China were boosting growth, have keep these markets well anchored. Turkey’s importance in global markets on the surface appears small relative to these factors, so its reasonable to expect that Turkish markets eventually will find their footing and the risks will remain local. But any sense of a significant economic problem in Turkey, an important and liquid emerging market, could pull an important prop out of the benign emerging market story. That could be the economic legacy of this weekend’s events.