Everything You Need to Know About the Crisis in Turkey and How to Profit From It – Introduction
On Friday, world markets had a rough day caused by the crisis in Turkey. Turkey is the 18th largest economy in the world with a GDP of more than $860 billion. It is one of the most historical countries because of its location. It borders eight countries including Greece, Bulgaria, Armenia, Azerbaijan, Iran, and Iraq. This means that the country is both aligned to European and Asian countries. For decades, the country has cultivated relationships with Europe. It has sought to enter the European Union and is also a member of NATO.
Last week, the country was in crisis mode. In the past five days, the Turkish Lira has lost more than 30% of its value against the dollar. YTD, the lira has lost more than 70% of its value against the dollar.
The challenge for the Turkish economy started after the attempted coup. The coup failed, which empowered the president, Recep Erdogan. His government arrested thousands of people who were suspected of orchestrating the coup. He changed the constitution to give himself more power and before the recent election, he announced that he would be more involved in monetary policy decisions.
Around the world, the central bank is given the mandate to operate as an independent body with no interference from the executive branch. Countries where the elected officials are also responsible for monetary policy decisions have not succeeded a lot because of their reluctance to raise rates even when it is necessary. In an interview with Bloomberg before the election, Erdogan said that he would oppose all measures to raise rates.
Then, a month after winning, the central bank announced that the inflation in the country would reach 15% this year. With inflation rising, the central bank is mandated to raise interest rates to save the currency. Still, the central bank refused to raise rates.
Then, the problem for the country was compounded with the United States decision to impose sanctions on Turkish leaders. The sanctions were in response to the arrest of an American cleric. He has been held in custody in Turkey for more than 2 years. Turkey has avoided releasing him, citing the independence of the justice department. Then, the last nail on Turkey’s coffin was the decision by the US to impose tariffs on Turkish steel and aluminium. Its steel will receive a 50% tariff while its aluminium will receive a 25% tariff. More tariffs will be expected.
For traders, the crisis in Turkey creates an opportunity. The massive sell off that happened a week ago was excess and overdone. This is because, while Turkey is a big economy, it is not that large in the world market. For example, Turkey’s business with the United States is worth less than $25 billion annually. Turkey is the 32nd trading partner with the US. Therefore, the US can withstand the shocks of Turkey.
The challenge lies with the European Union. Turkey is the fourth largest export market for EU goods while the EU is the largest market for Turkish goods. This means that a collapse of the Turkish economy would lead to major shocks for the EU. However, as the Turkish crisis unfolds, there is a likelihood that the central bank will raise rates and that stability will come. This opens an opportunity for buying the stocks that have sunken with the crisis.