The last time that the Turkish Lira faced a crisis was in 2001 when many Turkish banks went bust. The Turkish Lira has plummeted more than 42% since the beginning of the 2018 with the currency losing nearly 16% on Friday itself. Where does Turkey go from here and what does it mean for other emerging market economies?

Turkey is not small…

With an annual GDP that is closing in on $1 trillion, Turkey is just too large an economy to be dismissed with a wave of the hand. Turkey has a GDP per capita of $12,000 and so the average Turk is 6 times richer than the average Indian. But above all, Turkey is a key NATO ally of the US and is home to the NATO’s second largest base after the US. Situated at the crossroads of Europe, Russia and West Asia, Turkey has a very great strategic advantage. So any impact on Turkey is going to be big for Europe and for most EMs!

Why is the Lira jittery?

The problems for Turkey began when their supreme leader, Tayyip Erdogan became the leader for life. This largely led to the undermining of the Turkish bureaucracy. The situation actually imploded when Turkey refused to release the American pastor who had been arrested in Turkey recently. Erdogan was already unhappy that the US had refused to extradite one of the leaders of the coup against Erdogan. The US has threatened Turkey with sanctions, which could virtually cut off Turkey from world markets. The problem gets worse for Turkey because this 42% devaluation of the Lira comes at a huge cost as most of the Turkish debt is denominated in US Dollars. Even as Turkey stands at the crossroads of world trade, the impact could be felt across EMs in the form of currency devaluation vis-à-vis the dollar. In an uncertain world economy, Turkey could be as bad as Russia in 1998!