Turkish banks are pulling back on credit to consumers and businesses. Power plants have shut down because of the soaring cost of imported fuel. Building projects in Istanbul stand half finished after their backers ran out of money.
And, in a shopping mall beneath Istanbul’s Trump Tower, Cenap Sarialioglu says he worries he will not be able to supply customers at his pharmacy with the prescription drugs they need to stay alive.
Mr. Sarialioglu, who is also president of the Istanbul chamber of pharmacists, said he has been getting calls from other pharmacists concerned that wholesalers will cut off supplies of crucial medications because they can no longer make a profit. Drug prices are set in Turkey, so the sharp drop in the lira has made it costly to import pharmaceuticals.
“Starting in September, we may have problems,” Mr. Sarialioglu said. “An urgent solution is needed.”
It has never been easy doing business on the edge of the war zone, in a country with its own rough politics, eye-popping inflation and volatile currency.
But in recent weeks the challenges facing Turkish banks and businesses have acquired a new level of intensity that is visible from the streets of Istanbul to the global financial markets. After losing a quarter of its value in a matter of days this month, the currency had recovered some ground before falling again on Friday. Its latest decline came as other emerging market currencies, like the South African rand and the Indian rupee, lost ground as well.
Turkey’s Currency crisis
The lira’s plunge in value, exacerbated by a dispute with the United States over a detained pastor, has exposed economic pressures that have been gathering for years. And some economists say that they could be reaching a breaking point. Over the past decade, businesses gorged on cheap debt, which is harder to pay back as the lira falls, while banks handed out credit cards like party favors.
“A recession is inevitable,” said Selva Demiralp, a professor of economics at Koc University in Istanbul. “The question is whether it’s going to be a soft landing or a hard landing.”
Turkey’s problems are so acute, Professor Demiralp said, that only drastic measures would stabilize the lira and contain official inflation of almost 16 percent. She said that the central bank would need to raise the official interest rate to around 28 percent, from 17.75 percent.
But the government of President Recep Tayyip Erdogan, who is widely perceived as controlling the central bank, has shown no willingness to allow even a more modest rate increase or to curtail government spending on public works.
Government countermeasures so far have been regarded as tepid. Turkish bank regulators on Thursday announced limits on consumers’ purchases made with credit. The central bank relaxed rules on the amount of money commercial banks need to keep in reserve, to free up cash they can use to deal with currency market turmoil. The government has insisted it will not restrict how much money Turks can transfer out of the country.
In a conference call with investors Thursday, Berat Albayrak, the Turkish finance minister, insisted that the banking system was healthy and promised measures that would bring inflation down to single digits. Mr. Albayrak offered few specifics, according to reports in Turkish and international media. And he ruled out assistance from the International Monetary Fund — a step many analysts say will be essential to stabilize the economy.
Yet there is no sign that Mr. Erdogan is ready to allow measures that would restore investor confidence. Nafez Zouk, chief emerging markets economist at Oxford Economics in London, said he did not think the lira’s recent rally would last.
“As soon as the next big thing hits the headlines,” Mr. Zouk said, “we are going to be back to square one.”
A recession would bring to an end nearly two decades of uninterrupted growth in Turkey. Most young people don’t remember the last serious downturn in 2001. Since then, the country has cut poverty in half, brought millions of people into the middle class and, until recently, been embraced as a darling of international investors.
But the growth was built largely on a construction boom fueled by easy credit and government spending. The success story is looking increasingly unsustainable.
Even for Turks used to double-digit inflation and wild currency swings, the latest crisis has an ominous feel.
On a street called Nur-u Osmaniye, steps from Istanbul’s famous grand bazaar, Arthur Kosaryan nodded toward a large empty storefront opposite the jewelry shop where he works. The space once housed one of Istanbul’s finest antiques shops, Mr. Kosaryan said. But the landlord demanded the rent in dollars.
First a wave of terrorist bombings and an aborted coup in 2016 drove away tourists. Then, the lira began a slide early this year that wiped out nearly half its value. The shop owner could no longer afford to pay the rent and went out of business.
“In this volatility people stopped buying things,” Mr. Kosaryan said. “They are waiting for prices to calm down.”
So far Turkish business leaders are putting on a brave face. “We will survive,” said Ugur Dalbeler, the chief executive of Colakoglu Metalurji, a steel maker. “We have gone through harder times.”
Mr. Dalbeler did not say, but some Turkish managers may also be wary that expressions of pessimism would be perceived as unpatriotic in a country where the government has been known to seize assets of people considered disloyal.
Even by Turkish standards the steel industry is in a tough spot, as Mr. Dalbeler conceded. President Trump imposed a 50 percent tariff on Turkish steel after talks broke down to win the release of the detained pastor, Andrew Brunson.
“There is no way in the steel business you can compete when you have such a disadvantage,” said Mr. Dalbeler, who is also the president of Turkish Steel, an industry group.
Mr. Dalbeler, who in his youth was an exchange student in Iowa and speaks American-accented English, attributed Turkey’s woes to a plot by the United States and Mr. Trump, rather than the policies of the Erdogan government. That is a common view among Turks.
Years ago, Mr. Dalbeler said, Iraq was the Turkish steel industry’s biggest market. But the Arab Spring — seen here as the consequence of American policy — led to civil war in Syria and severely undercut the Middle East as a market for steel. Turkish steel producers, who specialize in the reinforcing bars used in construction as well as pipes used by the oil industry, adapted in part by increasing sales in the United States.
Now they will adapt again, said Namik Kemal Ekinci, head of a separate industry group that represents steel exporters. “We will be able to find new markets,” he said. Mr. Trump and his advisers, he added, imposed tariffs because they were “jealous of our steel industry.”
On Thursday Istanbul was noticeably calmer than late last week. The lira traded at 5.75 to the dollar, compared with 7 to the dollar at the beginning of the week.
In a narrow shop in Istanbul where he trades gold and silver, Gabriel Saglamoglu was defiant. “The Turkish economy is not going to be destroyed by a single tweet,” he said, referring to Mr. Trump’s announcement last week on Twitter that he would impose higher steel tariffs.
Business was frenzied a few days earlier, Mr. Saglamoglu said, as Turks bought precious metals as a hedge against the turmoil. But things have calmed down in part because of a pledge by Qatar to invest $15 billion in the Turkish economy, he said.
But economists considered Qatar’s show of solidarity insignificant in proportion to Turkey’s problems. Loans taken out in dollars are the main source of concern, since a falling lira makes them more expensive.
The country’s companies will require $200 billion in financing from foreign banks and investors during 2018 to roll over existing debt, according to estimates by Oxford Economics. Lenders’ willingness to provide that financing is in serious doubt.
On paper the number of bad loans in Turkey has not reached alarming levels. But several large Turkish companies have already asked banks for help restructuring their debts in recent months. Economists worry that others could run into trouble and banks may not be able to offer a lifeline.
The currency crisis has already begun to reveal the economic weaknesses that had been concealed by breakneck growth.
Several Turkish power plants have shut down temporarily because of the soaring cost, in lira terms, of imported fuel, though there have not yet been any blackouts. Companies are finding it more difficult to afford factory machinery and hospitals have been forced to buy cheaper X-ray machines.
The pharmacist, Mr. Sarialioglu, who remembers when Ivanka Trump visited the Trump-branded complex in Istanbul several years ago, said he worried about shortages of cancer drugs. They are almost always imported. The Turkish government regulates the cost of drugs, leaving no room for suppliers to raise prices.
“In oncology there are no substitutes,” Mr. Sarialioglu said. “If the treatment does not happen very efficiently and right away, one may have irreversible consequences.”