Turkey’s economy resembling crisis-hit Lebanon, BlackRock director says

Turkey’s troubled economy is resembling that of crisis-hit Lebanon, according to a senior employee of BlackRock, the world’s largest asset manager with $7.4 trillion under management.

The policies of the Turkish authorities mean that banks are exposed to large swathes of foreign currency deposits, while a surge in the circulation of the lira is adding to local demand for dollars and euros, said Amer Bisat, managing director of BlackRock’s Sovereign and Emerging Markets Alpha team in its global fixed income department.

“Turkey macro eerily resembles Lebanon,” he said. “It can’t end well.”

The country’s tourism industry is also collapsing, leading to a shortage of hard currency, while interventions by the central bank in the foreign exchange markets have left its reserves, net of liabilities, in negative territory, Bisat said.

Turkey’s lira weakened briefly beyond 7 per dollar on Thursday, taking it close to an all-time low of 7.269 against the U.S. currency reached in mid-May. The Turkish government has sought to protect the lira from weakness by ordering the central bank to sell dollars while requiring it to support economic growth by slashing interest rates, which are now negative when taking account of inflation of 12.6 percent.

Meanwhile, the Turkish lira money supply in Turkey is increasing as state-run banks flood the market with cheap loans and restructure other money owed.

Economists including Tim Ash, a senior emerging markets strategist at BlueBay Asset Management in London, warned this week that the central bank should swiftly revise its monetary policy. Ash urged it to take a “101 monetary policy” lesson to avoid further financial pain.

In Lebanon, savers are unable to fully access their foreign currency deposits and prices of most goods have nearly tripled. The value of its currency has fallen by 80 percent and much of the country has ground to a halt economically. Those who still have work are surviving month to month.

Last week, France urged Lebanon to take “serious and credible corrective measures” to right its economy. “Help us help you,” French Foreign Minister Jean-Yves Le Drian said at a news conference with Lebanese counterpart Nassif Hitti in Beirut.

Turkey has a long history of financial crises and severe lira devaluation. The government erased six zeroes off the lira a little over a decade ago. The country has agreed more than a dozen standby deals with the International Monetary Fund, successfully completing only one – Turkish President Recep Tayyip Erdoğan’s governin party paid back a last loan tranche of the country’s most recent IMF accord just before the 2008 global financial crisis.

Erdoğan has ruled out IMF financial aid, has slammed so-called “economic doom-mongers” for criticising his government's policies and says the economy will recover strongly in the second half of the year. Turkey can hardly rely on financial help from the European Union – relations are fraught over a dispute with Greece over territory and Ankara’s military involvement in Libya.

Ratings agencies who cover Turkey’s sovereign debt are not convinced by Erdoğan’s upbeat predictions.

Last week, Standard & Poor’s said economic imbalances may be returning to the country due to the credit splurge. The fall in the value of the lira this week prompted the Financial Times to publish an article by its editorial board calling for swift remedial efforts by the government.  

"Erdoğan's gamble on cheap money and propping up the currency has failed," the FT said. "Turkey's president cannot confound the basic laws of economics."