In the world of intense financial integration inflows and outflows of short-term capital, or hot money to use the popular jargon, acquires tremendous importance as a determinant of macroeconomic stability. Especially for countries suffering from serious budget, trade and balance of payments deficits, the timely and sustained provision of sufficient financial sources in order to maintain economic growth momentum becomes a critical political issue. In the same vein, speculative attacks to the national currencies through sudden capital flights and withdrawal of portfolio investments by international players might trigger financial crises, which might undermine the democratic legitimacy of political actors. Financial integration to the global capital networks enable developing countries to attract both portfolio and direct investments to boost their growth potential, but at the same time, exposure to international financial flows create potential sources of domestic volatility. The risks of economic destabilization increase along with the depth of financial integration, as well as the degree of (in)congruence of fundamental foreign policy options with the global powers that control the nerves of international capital flows.
Turkey's status as an emerging power in the world economy with major external financing needs, and rapidly deteriorating bilateral relations with the U.S., perfectly exemplify the evaluations presented above in the light of the sliding value of the Turkish lira. Turkish-American relations have been going through a rough patch since President Trump assumed power in Washington D.C. as the two countries adopted contrasting positions with respect to the PKK-affiliated People's Protection Units (YPG) and Democratic Union Party (PYD) forces in Syria; the solution of the Palestinian issue and the status of Al-Quds (Jerusalem); attitudes to be adopted towards Israel and Iran; implementation of sanctions against Tehran; extradition of the leader of the Gülenist Terror Group (FETÖ); the judicial process against Halkbank; Turkey's intensifying relations with Russia including the purchase of S-400 ballistic missiles; and the delivery of F-35 fighters to the Turkish Air Force. This list is not exhaustive of the fundamental areas of disagreement or conflict among the two major NATO allies; but the bilateral tensions have reached a climax over the dispute concerning the release of evangelical pastor Andrew Brunson from house arrest. The fact that the Trump administration imposed sanctions against Turkey's justice and interior ministers under the Global Magnitsky Act of 2016, which allows the U.S. to target individuals and entities involved in corruption and human rights abuses in the world was quite disrespectful and shocking. While Ankara displayed a public rebuke and imposed similar sanctions on U.S. ministers so as to protect its diplomatic prestige, the depth and magnitude of American initiatives aimed at penalizing Turkey created shock waves among international investors.
There is no denying that the Turkish economy is going through turbulent waters as global liquidity is contracting in the wake of interest rate hikes in the U.S. and the declining risk appetite of international investors. Just like other emerging market currencies, the lira has lost considerable (around 40 per cent) value against the U.S. dollar over the course of this year and banking shares faced downward pressure due to concerns about slowing economic growth, debt-restructuring requests by private holdings and liquidity problems of the service and construction giants. But the transition to the presidential system and a revamp of the economic management team this July with more clearly defined areas of operational control was supposed to insert an element of stability and predictability going forward as far as international investors were concerned.
But instead, daily messages coming from the U.S. administration hinting that economic sanctions against Ankara might be expanded and cut off the country from international financial markets triggered perpetual speculative attacks against the Turkish lira. Increasing daily volatility of the foreign exchange market inevitably raised concerns in Turkey as a new growth model was announced by Treasury and Finance Ministry Berat Albayrak to outline the structural reform agenda in the medium term. The proposed growth model will tighten fiscal discipline, rationalize public expenditures and improve efficiency of public-private schemes for structural transformation. The Turkish economy still relies upon a robust financial governance architecture with in depth experience of avoiding financial crises. If the political issues with the U.S. could be resolved with added urgency, then the speculative attacks are likely to ease, which will provide economic management enough time to insert a more rational and production-oriented growth model.