Turkey's president Recep Tayyip Erdogan has so far employed two tactics in the face of the economic turmoil hitting his country. The first is to up the rhetoric, saying the country is under economic attack and being "stabbed in the back" by the US.
This has been backed up by threats of a boycott against US electronic products such as iPhones, and on Wednesday by new tariffs on some American imports, including cars and alcohol. The second is to assure everyone that the country’s economic fundamentals are sound.
While these may go down well at home, neither will do much to persuade the financial markets. The Turkish lira has been battered in a few recent sessions, though emergency manoeuvres by the central bank led to some bounce in the past couple of days. Still, the lira has slipped steadily in recent months on rising concerns about Turkey’s economy and has lost around 40 per cent of its value this year.
Fears about economic overheating follow years of strong growth and a burst in government spending since 2017. The rate of inflation is now 16 per cent and heading higher and a large current account deficit on the balance of payments leaves Turkey vulnerable and reliant on foreign capital. Turkey's companies have not far off $300 billion of US dollar borrowing, which will now cost a lot more to service for those who are earning in lira.
All the ingredients for an exchange rate crisis are there and the Turkish banking system is also vulnerable. The problem for Turkey is that market confidence, once lost, is difficult to regain.
Erdogan needs to move quickly. But as he has ruled out higher interest rates, controls on capital movements, or any kind of IMF rescue and appears to remain wedded to the idea of economic growth at all costs, it is not clear how he plots a way out, beyond reversing course.
On a wider scale, events in Turkey – and wider trade tensions – have set off nerves across emerging markets – particularly those with US dollar exposures and large current accounts deficits. Stockmarkets are now in retreat and currencies are volatile. There is a way to go on this one yet.
