MIT Professor Warns Turkey of Economic Collapse

The Turkish economy may collapse in a couple of years if politicians do not show the West that the economy is trust-worthy, Daron Acemoglu, Professor at the Massachusetts Institute of Technology, told the daily Hurriyet.

“Economic growth comes from consumption and consumption is encouraged by loans. This is not sustainable. We have very little time left. The building has not collapsed yet, but it can. There might be a crisis,” Acemoglu said, Anadolu Agency reported.

 “This may occur in the next one or two years,” he added, indicating that Turkey still attracts short-term foreign capital, which allows narrowing the current account deficit. However, this might change when Turkey has difficulties to take out loans to pay off its debts, he said.

The election of Donald Trump as the president of the United States is speculated to cause foreign capital to be withdrawn from Turkey, and in Trump’s presidency, interest rates are expected to increase, and the rise in interest rates would cause foreign capital to be withdrawn from the Turkish market, Acemoglu warned.

“The positive image on Turkey still remains. But they (foreign capital) are gradually being withdrawn. This is why the US dollar has gained value (against the Turkish Lira). If the interest rates rise in the US, which is expected in Trump’s administration, the withdrawal of capital will accelerate. We have to act before this happens,” he said.

“In the long-term, we have to show the West that our economy is developing. Because foreign money comes in by virtue of the reports they give. We are shaping our foreign policy by our domestic politics. This is not good,” he added.

Meanwhile, the Organization for Economic Cooperation and Development has slashed its 2016 growth forecast for Turkey to 2.9% in its latest outlook, down from 3.9% in its previous estimate.

“The Turkish economy continues to face geopolitical headwinds and unsettled political conditions, after having weathered a coup attempt in July and engaged in military operations in Syria,” said the OECD.

Uncertainties are high but fiscal, prudential and monetary policies are supportive and should spur household consumption from late 2016 onwards, it noted, adding that the economy has so far proven resilient to severe shocks.

GDP growth is projected to pick up in 2017 and in 2018, driven by recovering household consumption and gradual increases in exports, according to the OECD.

It forecasts growth of 3.3% in 2017, again lower than it had earlier expected, and 3.8% in 2018.