The recent Turkish economic crisis casts heavy shadows on the overall economic situation in Turkey and how this might also hit emerging markets.

However, discussion about this subject is controversial and requires a fair understanding of the Turkish economy over the past two decades.

One also needs to appreciate the historical, religious, political and economic relations between Egypt and Turkey before any attempt is made to explore the recent currency crisis in Turkey and expectations about its potential impact on emerging markets and Egypt in particular.

Turkey and Egypt share deep-rooted ties, as both countries have maintained strong historical, religious, cultural and social relations.

Historically, Egypt was also part of the former Ottoman Empire for three centuries. Diplomatic relations between Egypt and Turkey date back to 1925 when the two countries exchanged diplomatic representatives.

However, relations between them since then have gone back and forth between coldness and warmth. They have been extremely friendly at times and strained at others.

In 1925, Turkey established diplomatic relations with Egypt at the level of chargé d’affaires.

The Turkish mission was upgraded to ambassadorial level in 1948. In 2005, both countries signed a free-trade agreement.

In 2008, Egypt and Turkey signed a memorandum of understanding to expand military relations and cooperation between the two countries.

However, relations have also been relatively tense on many occasions in the history of both countries, including during the rule of Gamal Abdel-Nasser in Egypt in the 1950s and 1960s.

They also strongly deteriorated in the period following the 30 June Revolution and the overthrow of former president Mohamed Morsi.

Subsequently, the Egyptian government expelled the Turkish ambassador from Cairo.

According to the US Central Intelligence Agency, Turkey’s largely free-market economy is driven by its industry and, increasingly, its service sectors.

The recent period of political unrest has given way to domestic uncertainty and security concerns, which are generating financial market volatility and weighing on Turkey’s economic outlook.

Between July 2016 and March 2017, three international credit-rating agencies downgraded Turkey’s sovereign credit ratings, citing concerns about the rule of law and the pace of economic reforms in the country.

According to economic research prepared by the A&T Bank in 2017, Turkey’s exports to Egypt decreased by 12.5 per cent to $2.7 billion in 2016, and imports rose by 18.7 per cent to $1.4 billion compared to 2015.

The trade volume between Turkey and Egypt stood at $4.2 billion in 2016 and is on a descending trend.

Egypt mainly imports mineral fuels, oils, distillation products, iron and steel and machinery, nuclear reactors and boilers from Turkey, while it mainly exports plastics, cotton, articles of apparel, accessories and man-made staple fibres to Turkey.

Surprisingly, the Turkish lira fell in one day on 10 August 2018 by 14 per cent. It has also fallen by more than 45 per cent against the US dollar since the start of the year.

The deterioration of the currency increased after the US imposed tariffs on steel and aluminum imported from Turkey, as well as sanctions over the continued detention of an American pastor in Turkey since 2016.

However, the real reasons for the steep decline in the value of the lira are due to a number of other factors, notably the increased volume of borrowing, especially from the private sector.

Turkey’s trade deficit between exports and imports also increased by 37.5 per cent compared to the previous year to reach $77.06 billion during 2017.

And the reduction of Turkey’s credit rating by the rating agencies further added pressure on the Turkish lira and weakened confidence in it and in the Turkish economy.

However, what does the Turkish lira crisis mean for the rest of the world? Some experts have warned that the crisis may extend to other emerging economies despite the fact that Turkey’s economy accounts for just one per cent of the world economy.

This was evident when the European markets fell sharply following the crash of the Turkish lira, particularly in countries with banks exposed to the Turkish currency.

Emerging-market currencies have continued to slide as investors worry about contagion. Investors who have strong doubts that other emerging markets could follow in Turkey’s footsteps, are pulling their money out of countries such as India and Argentina. This could happen in Egypt as well.

There are worries that Egyptian markets could be flooded with unnecessary Turkish products sold cheaper than similar Egyptian ones.

This, of course, could harm fair practices. Moreover, the tourism sector in Egypt will likely face greater competition from Turkey after the fall of the Turkish lira, making Turkey more attractive and a cheaper tourist destination particularly for Russian and Ukrainian tourists.

The export sector in Egypt may suffer as well as a result of the Turkish crisis, as Turkey’s exports of products would be cheaper than similar Egyptian products due to the weak Turkish lira.

In addition, investors might be attracted away from the Egyptian stock market to benefit from the deteriorating lira.

* The writer is vice-chairman of Metropolitan Egypt Consulting.

* A version of this article appears in print in the 30 August 2018 edition of Al-Ahram Weekly under the headline: Turkish contagion?