Turkey is headed for a period of higher interest rates, lower growth and weaker currency.
Domestic political instability, which is mixing with international economic shifts to drive the fall the in lira, is going to stay at a high level. There is a political battle within the elite – corruption investigations are tool in this battle – and elections planned at every level of government over the next 18 months will ensure tensions stay high.
This will be reinforced by an economic slowdown. Higher rates will mean less consumer spending, hurting companies that focus on the domestic market, and will sap funding for big infrastructure projects. Erdogan needs these big infrastructure projects to keep his business supporters happy and dole out patronage.
The falling lira hurts private companies with foreign denominated debts--reducing their profits and forcing them to delay investments. Worst hit are companies in construction and energy intensive industries. Higher interest rates will depress domestic demand. Domestic focused manufacturers are going to get slammed but exporters can benefit--if they don't rely too much on foreign inputs (on average about 25% of inputs used to manufacture products in turkey are imported--generally raw materials, which Turkey lacks). Tourism will benefit from continuing weakness in the lira (accounting for about 4% of GDP). The current account deficit will remain a problem: Turkey imports nearly all of its fuel, which it pays for in dollars, making up 3/4 of its current account deficit.
Turkey needs long term growth at 5% to accommodate new entrants in workforce. Its not going to get near that any time soon. Unemployment is officially at about 10%, although its closer to 20% if you use more expansive definitions of the labor force.
Public debt is low-- 40% of GDP. However structural inefficiencies can cause things to get out of hand quickly. Tax collection is weak and government funding is dependent on consumption taxes, so an economic slowdown can sharply reduce government revenues. Private debt is higher. Total foreign debt in corporate sector is $260bn, mostly short term with $110bn maturing in next 12 months. Companies with foreign debt have seen a 30% rise in funding costs due to lira depreciation over the past months.
Long term I'm a big believer in Turkey. It has a growing consumer base, strategic location and most of all, great people. But its government has been extremely lucky in recent years: lurching from crisis to crisis, it has somehow always managed pull itself back from the brink at the last moment, sweep its problems under the carpet, and carry on. That playbook can't work forever.