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Turkish lira drops to half value: What will the impact be on the GCC?

Turkey has been suffering through an economic catastrophe in recent weeks. Following a plummeting currency, the value of which has dropped by more than 45%, the country’s population has been going through very difficult times.

Now, President Erdogan is expected to reveal a new action plan to ease investor concerns, which should be disclosed today. The announcement came yesterday from Erdogan’s son-in-law, Finance Minister Berat Albayrak.


Graph by Quartz, data by FactSet

“From Monday morning onwards our institutions will take the necessary steps and will share the announcements with the market,” Albayrak said.

Albayrak said that a plan has been prepared for banks and the real economy sector, including small to mid-sized businesses, which have been most affected by the Turkish lira-US dollar exchange drop. “We will be taking the necessary steps with our banks and banking watchdog in a speedy manner,” he said.

Some 40% of the Turkish banking sector’s assets are comprised of foreign-currency loans, according to Quartz.

More details should be revealed today, and throughout the week.

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GCC impact

“The Arab Gulf states have been an important source of investment in Turkey, from its financial markets (including Islamic finance) and defense industry to real estate and tourism,” Dr. Manuel Almeida writes for Arab News. “Despite the belt-tightening across the GCC, they also represent a key export market for Turkey’s companies and with potential for growth.”

Trade between Turkey and the GCC has increased significantly in recent years, with World Bank figures showing a trade volume of $4.8 billion in 2006 tripling to $16 billion in 2016.

Table by Oxford Gulf and Arabian Peninsula Studies Forum (OXGAPS), data by Turkish Statistical Institute

The recent US-imposed aluminum and steel sanctions have surely had an effect, but this decline has been accumulating over the entire year.

Now, Turkey could turn to export its product to other countries: the Gulf states. In fact, Turkey’s largest export markets in 2014 were the UAE and Saudi Arabia, with key products including construction materials, iron and steel, according to a report by OXGAPS. With Turkey reluctant to export to the US, these two countries could pick up the tab, fueling their construction booms.

When an exporter’s currency devaluates, in this case Turkey, it will see an increase in export revenue as its goods become more affordable to other nations. Imports, however, will take a major hit, as the country in question cannot afford as much as it could in the past, slowing down the intake of foreign goods.

Turkey has also grown as a tourism destination in recent years. One of the reasons has been the rise of popularity of Turkish soap operas in the region, with their stars burned into the minds of Arab fans.

A cheaper lira could encourage GCC tourists to flock in. Turkish soap operas are as popular as ever in the region, and economic struggles are not likely to keep enthusiastic fans away.

Conversely, imports from the GCC could be affected. Saudi imports, for example, mostly constitute petrochemical products. Oil prices have made a recovery recently, and a decrease in the value of the lira will not help the country increase its purchase of hydrocarbons. The oil sector in the region could take a slight hit, with an importer such as Turkey slowing down on its imports.

The OXGAPS report explains that Saudi Arabia supplied around 10% of Turkey’s crude oil.

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A melting pot of problems

GDP growth in Turkey has been telling a different story: it was 7.4% in the first quarter of 2018 and 7% in 2017, Business Insider reports. These strong figures have not been enough to bring the country back to its feet.

The lira plunged to a fresh record low of 7.24 against the dollar during in Asia Pacific trade, where markets were opening for Monday morning, Reuters reports. On Friday alone, the currency depreciated by 14%, Bloomberg explains.

The loss in value can be attributed to several factors: a weak economy, an unstable political atmosphere, rising conflict in international trade, and even a recent coup.

Erdogan’s row with US president Donald Trump is one of the latest instigators of this decline in national currency.

“Turkey’s refusal to release American citizens and diplomatic employees imprisoned in the aftermath of a coup attempt against Erdogan in 2016, including Pastor Andrew Brunson, led the U.S. to begin imposing sanctions earlier this month,” Bloomberg explains. “More are likely to come if Turkey keeps them in jail.”

On Friday, Trump doubled steel and aluminum tariffs on Turkey: 20% on aluminum, and a tremendous 50% on steel.

These tariffs are believed to be the first in Trump’s ongoing trade war with Turkey. Further sanctions could be lingering on the horizon.

Another factor that has been blamed on Erdogan is his refusal to raise interest rates to counteract the lira’s falling value. In response to the current inflation, which is resting at 16% according to Business Insider, Erdogan has not requested Turkey’s central bank to raise interest rates, which is the customary plan of action when a country goes through such a boom in prices.

The Turkish president has been vocal in his distaste for interest rates, according to one of his speeches in May that Reuters reported. He deems them “evil.”

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