Turkey and Saudi Arabia are joined in a currency decline for differing reasons. Saudi Arabia currency is in trouble over a combination of falling oil prices and trouble with the Chinese currency while the Turkish Lira is really under assault by a lack of confidence and a softening economy. There is an indirect relationship between the two economies, Turkey is an importer of energy and is wholly dependent on the cost of imported energy to meet its needs thus a low oil price keeps Turkey’s economy from bottoming out. There are two basic reason why the Turkish economy is facing difficulty, the primary one being investor capital is leaving for more profitable and more secure post-recession destinations and all the BRICS will be affected and the second reason is with a declining economy the effects of political corruption, crony capitalism and misspend money on relatively needless building projects begin to take their toll on the economy even though much of the building had Keynes affect before. The Turkish economy has been reasonable well managed despite the corruption and waste and Turkey has secured many free trade agreements with now declining economies but the long term heath of Turkey seems very sound. The Central Bank of the Republic of Turkey is finding itself straightjacketed from intervention by low foreign currency reserves. High imports and high business debt in dollars and euros make currency devaluations painful and less likely to be offset by exports, the economy likely to shrink in the short term. One real terrible problem is Turkish confidence, the general public is sensing all is not right with the economy and moving away from the Lira. Turkish banks are starting to see a significant drive to hedge with the US Dollar. While a very smart move by a public that is very well seasoned at hedging bets on currency in the inflation days, it is also a very Greece like lack of confidence in the local currency and this could become a self-fulfilling prophecy. Enrique Diaz-Alvarez, chief risk officer at Ebury, said: “We think the lira is one of the most vulnerable emerging market currencies.” as reported by the Financial Times in April but the current inability to form a coalition government and going to snap elections and the renewed terror war with the PKK are also harming Turkish confidence in its currency.
Saudi Arabia faces its own conundrum, as the Kingdom needs to keep oil prices low when failing to do so would boost both the Iranian and Russian economies at the worst possible moment for doing so and would undermine all of Saudi Arabia’s diplomacy and strengthen Iran’s hand in Yemen. Having two problems at one is going to be a strain on the Saudi economy, it has a significant sovereign fund to weather low oil prices but add weakening investments in China and weaker Chinese demand of petroleum and the lack of impact on US fracking and Saudi Arabia could be looking at five or more years of a sluggish economy. While the Saudis could probably weather this, the other Gulf States might not so House of Saud may find itself in a game of economic Chicken with Iran alongside an ongoing war with Iranian proxies.
Meanwhile the Turkish Lira is being squeezed by demand for other currencies and more ominously an increasing budget deficit. The Lira has always been mismanaged in terms of deficit spending but the cost of borrowing is going to increase and low energy prices will not make up the difference and those energy prices are already being negated by a declining Lira and if Saudi Arabia can’t or won’t keep those prices low then the Lira could find itself in a free fall. Fortunately there is an oil glut and weakening demand from China but Turkey may quickly find it can’t benefit from low energy prices. Worse still for the Lira is that former PM Erdogan now President Erdogan has a pattern of politicizing interest rates, pushing for a lower rates which increases inflationary pressure which increases capital and investor flight from the Turkish economy.
Both Saudi Arabia and Turkey are suffering from a lack of political direction. Saudi Arabia needs to commit to a long term anti-Tehran strategy that creates allies and gives a realistic picture of what will be required of Gulf States and citizens to secure their long term futures. Turkey needs to establish a healthy political direction that ends the possibility of both one man rule and one party rule because the political bottom line for those ruling the country right now isn’t always going to dovetail with the economic bottom line for citizens. Saudi Arabia has taken necessary but costly steps that are having negative effects on its economy while Turkey’s flaws have finally begun to outpace what it has been doing right. Neither are facing doom but both need to be able to make good long term choices. Saudi Arabia may not have a long term strategy that would survive domestic unrest and Turkey is farther away from being an inclusive society that can rally secularists, religiously conservative Muslims, Alevis and Kurds than it has been in decades. All of these problem are in the context of a larger problem of the Chinese economy slowing down and investment capital leaving BRICS but Turkey is well positioned for a soft landing if it gets its political house not just in order but in a good order and the Saudis have the capital to outlast an economic drought but need the ability to get the other Gulf States and their own public to buy into it. The Middle East is in a watershed moment and how well Sunni nations like Saudi Arabia and Turkey manage their economies will indicate how stable their politics are and how volatile the next few years will be regionally.