SUNWAY BUSINESS SCHOOL
BACHELOR OF ARTS (HONS) ENTREPRENEURSHIP, BACHELOR OF SCIENCE
(HONS) BUSINESS MANAGEMENT, BACHELOR OF SCIENCE (HONS)
BUSINESS STUDIES, BACHELOR OF SCIENCE (HONS) BUSINESS ANALYTICS,
BACHELOR OF SCIENCE (HONS) GLOBAL SUPPLY CHAIN MANAGEMENT,
BACHELOR OF SCIENCE (HONS) INTERNATIONAL BUSINESS, BACHELOR OF
SCIENCE (HONS) MARKETING
ACADEMIC SESSION : SEPTEMBER 2024
SUBJECT : ECN1054 FUNDAMENTALS OF ECONOMICS
ECN1034 ECONOMICS FOR BUSINESS
CASE STUDY PORTFOLIO DEADLINE: 4 AUGUST 2024, 11.59PM
1. There are ELEVEN (11) pages in this paper including the cover page.
2. This individual report will contribute 50% to your final grade.
3. The report must be typewritten in Arial with a size of 12, on double line spacing,
A-4 size paper and single sided. Work should be presented with a cover sheet,
which includes your name, unit number and tutor’s name. Students should use
the APA referencing style.
Marks will be allocated for content, presentation, and referencing.
IMPORTANT
Extensions and Late Submissions
The University requires students to adhere to submission deadlines for any form of
assessment. Penalties applied in relation to unauthorised late submission of work
are as follows:
(a) Submission must adhere strictly to the deadline. No extension will be given
and late submissions will be awarded zero.
(b) Subject lecturers are authorised to grant extensions for final reports within
their own subjects and agreements will be documented.
ECN1034 ECONOMICS FOR BUSINESS
ECN1054 / ECN1034 / Final Assessment (MS) / September 2024
General Guideline
(a) This paper consists of two sections. Read the extracts and answer one question
from each section. The extracts provide the scope or context for your research
and answers.
(b) You are required to support your answers, where appropriate, with credible news
articles which are directly relevant to the central issues contained in the extracts.
(c) You should not describe or regurgitate information from the extracts or news
articles without applying economic terms or concepts where required.
(d) You should allocate approximately:
• 750 words for Section A, and
• 750 words for Section B.
(e) You are reminded of the need for good presentation and proper use of the
referencing style. Poor word choices and sentence structure, very limited
appropriate references, and/or inappropriate style, would cause unnecessary
loss of marks.
(f) The deadline for submission is as follows and must be strictly adhered to:
• 4 August 2024, 11.59pm
(g) Please note that the assessment will be processed via Turnitin. Copying of other
students’ work or allowing your work to be copied will result in a zero mark for the
assessment. Marks will not be awarded for pasted copies from other sources
(i.e. direct quotation). Use your own words and note only relevant information in
your answer will be awarded positive marks. Irrelevant information will receive no
marks.
ECN1054 FUNDAMENTALS OF ECONOMICS / ECN1034 ECONOMICS FOR BUSINESS 2
ECN1054 / ECN1034 / Final Assessment (MS) / September 2024
Section A
Read the following extracts and then answer one question from this section.
Extract 1 Turkey’s spiking inflation and misguided policies
Turkey is grappling with a severe economic crisis marked by high inflation, currency
depreciation, and plummeting investor confidence. In October 2023, inflation hit a 24-
year high of 85.5% meaning prices nearly doubled. While Turkey inflation dropped from
71% in June 2024 to 61% in July, it remains cripplingly high, making it nearly
impossible for many citizens to sustain themselves as wages lag behind (see Figure
1). Over half of the population survives on around $500 USD per month, and most
pensioners are struggling with just $356. People’s wages have been depleted because
they can now buy less with their money.
Figure 1
Monthly inflation rate (%) in Turkey
from January 2018 to July 2024
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Oct 18
Apr 21
Oct 22
Apr 24
Apr 18
Apr 19
Oct 19
Apr 20
Oct 20
Oct 21
Apr 22
Apr 23
Oct 23
Jan 20
Jan 24
Jan 18
Jan 19
Jan 21
Jan 22
Jan 23
Jul 18
Jul 19
Jul 20
Jul 21
Jul 22
Jul 23
Jul 24
Turkey’s inflation has been rising rapidly because aggregate demand has been
excessively boosted – well ahead of the ability of supply to respond. This has driven
inflation expectations. The country’s leader, President Recep Tayyip Erdoğan, in
recent years has been seeking to stimulate economic growth through a mixture of
supply-side, fiscal and monetary policies. He has hoped that the prospect of high
growth would encourage both domestic and inward investment and that this would
indeed drive the high growth he seeks.
According to conventional economic theory, central banks should increase interest
rates and limit money supply in the economy to temper inflation and stabilise the
ECN1054 FUNDAMENTALS OF ECONOMICS / ECN1034 ECONOMICS FOR BUSINESS 3
ECN1054 / ECN1034 / Final Assessment (MS) / September 2024
currency. Despite rising inflation, however, the President forced the Turkish central
bank to do exactly the opposite, firing governors who disagreed with his expansionary
policy. For a long time, he insisted that interest rates be kept relatively low, in order to
keep credit flowing and the economy growing.
These interest rate cuts saw a large increase in the money supply, which in turn led to
a rise in aggregate expenditure and thus higher prices. The policy also led to a sharp
exchange rate depreciation. Between 2018 and 2024, the country’s currency, lira, has
fallen from 3.8 to USD in 2018 to 33.7 (see Figure 2). This depreciation further stoked
inflation as the lower exchange rate pushed up the price of imported goods. Turkish
businesses have been hammered by the lira’s fall in value, which has caused
production costs to spike.
Figure 2
US dollar (USD) to Turkish lira (TYR) exchange rate
from October 2020 to August 2024
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
Oct 21, Feb 24, Jun 30, Nov 3, Mar 9, Jul 13, Nov 16, Mar 22, Jul 26, Nov 29, Apr 3, Aug 8,
2020 2021 2021 2021 2022 2022 2022 2023 2023 2023 2024 2024
Turkey’s fiscal policy is also highly populist and unsustainable. It features continuous
support for business owners, inefficient and wasteful mega-projects, thus causing a
massive deterioration in the country’s budget deficit. The government also increased
the minimum wage by almost 50% to compensate for the skyrocketing inflation in the
country. The sharp increase aimed to help with the high cost of living and might appeal
to voters before the nationwide local elections of March 2024. However, this increase
is expected to push further up the country’s staggering inflation.
Source: Adapted from Geopolitical Monitor, 19 August 2024.
Extract 2 Turkey’s economy is paying the price of years of policy mistakes
Getting monetary policy wrong matters for most countries. However, it matters
particularly for countries like Turkey that are highly open to trade and financial flows,
and for whom exchange rate movements are a crucial source of fluctuation in the
ECN1054 FUNDAMENTALS OF ECONOMICS / ECN1034 ECONOMICS FOR BUSINESS 4
ECN1054 / ECN1034 / Final Assessment (MS) / September 2024
domestic economy. While central banks around the world are raising interest rates to
combat inflation, Turkey was determined to keep interest rates low, which in turn
triggered a collapse in lira.
Large fluctuations in the value of the lira matter for the Turkish economy for several
reasons. First, a significant part of Turkey’s imports are inputs used in the production
process, particularly of vehicles, machinery and mechanical appliances that make up
nearly half of the country’s exports. Any fall in the value of the lira will push up input
costs and hence prices, reducing the competitiveness of the country’s exports.
Second, Turkey imports a substantial part of its energy from abroad. In much the same
way, any depreciation of the lira will make it more expensive to import energy. Third,
Turkey is sitting on substantial external liabilities in foreign currency terms. This makes
the depreciation of the lira even more costly. Any loss in its value enlarges the amount
of resources required to repay a given level of foreign currency liabilities.
Policy corrections came in May 2023, when President Erdoğan finally allowed the
central bank to raise rates from 8.5%, to 50% in August 2024 to ensure price and
currency stability. To prevent further rises in public debt and inflation, additional tax
hikes were also implemented in a supplementary budget draft in July 2023. The
corporate tax rate was raised by 5%, reaching 30% for financial institutions and 25%
for companies in other sectors. The value-added tax was also raised by 2%, to 20%
for goods and services. The most painful hike though was the nearly 20% rise in the
special consumption tax for gasoline and diesel. More serious measures to control the
growing budget deficit are needed, but they will probably be implemented after the
2024 local elections.
Although Turkey’s switch to contractionary monetary policy is good news, it may not
have been sufficient to subdue inflation. In the past, Turkey’s central bank had lost
considerable credibility after four governors were dismissed by President Erdoğan for
raising interest rates. Hence, decisive policy actions are now needed to regain financial
markets’ trust that the central bank is truly independent and resolutely committed to
bringing inflation under control by keep monetary policy tight.
Source: Adapted from The Conversation, 3 April 2024 and
Middle East Institute, 18 August 2023.
Extract 3 Turkey’s long-term economic ailment
Because of high inflation and economic instability in the foreseeable future, some
residents of Turkey have given up and decided to emigrate in search of a better life.
According to the Turkish Statistical Institute, the number of emigrants in 2022
increased by 62.3% compared to the previous year. The age distribution of emigrant
population from Turkey reveals that the largest group was in the 25-29 age range,
reflecting the intention of young people to leave the country.
The escalating brain drain is a critical concern for the nation’s future. The growing
departure of Turkey’s brightest minds, driven by heightened restrictions on freedoms
ECN1054 FUNDAMENTALS OF ECONOMICS / ECN1034 ECONOMICS FOR BUSINESS 5
ECN1054 / ECN1034 / Final Assessment (MS) / September 2024
and a pessimistic outlook for the country, raises significant apprehensions. Without
skilled employees, meaningful domestic economic growth is hard to achieve. As the
exodus of intellectual capital gains momentum, it underscores the urgent need for
comprehensive measures to retain and foster the talents that could contribute
significantly to Turkey’s development.
This could feed into other structural issues discussed above. Without human capital
feeding into economic growth, Turkish policy-makers will remain under severe
pressure. There is only so much that fiscal and monetary interventions can achieve in
terms of supporting growth. The right people trained to the right level living in the right
places are crucial too.
The focus on using monetary and fiscal policies to combat inflation alone will not
address Turkey’s more fundamental problems, which are deeply systemic and impede
the nation’s development opportunities. Taking a closer look at the industrial scene
also reveals a situation characterised by low productivity and efficiency. The problems
include weak institutions, low investment in technology, and a shortage of skilled
workers, all contributing to an economic system that is struggling to make substantial
progress. This emphasises the urgent requirement for comprehensive reforms and
strategic investments to rejuvenate the whole industrial sector.
Source: Adapted from Economics Observatory, 18 March 2024.
1 ‘Growth is too high, domestic demand is too high, imports are too high. Everything
is overheating.’
To what extent is the above statement a satisfactory explanation for soaring
inflation in Turkey? [50 marks]
2 How far do you think contractionary monetary policy could effectively restore price
stability and sustainable economic growth in Turkey? [50 marks]
ECN1054 FUNDAMENTALS OF ECONOMICS / ECN1034 ECONOMICS FOR BUSINESS 6
ECN1054 / ECN1034 / Final Assessment (MS) / September 2024
Section B
Read the following extracts and then answer one question from this section.
Extract 4 Turkish banking risks and credit card lending surge
Turkish banks could face risks due to the recent rapid increase in retail credit card
lending if credit conditions tighten further or economic growth slows. Households have
significantly increased their credit card use in the inflationary environment to frontload
purchases and to spread their purchase costs over several months by paying in
instalments (see Figure 3). Since Turkey’s elections in May 2023, unsecured retail
lending has grown fast despite various macroprudential measures to curb inflation,
including a limit on monthly lending growth. The central bank is expected to pursue
tighter financial conditions, aided by targeted bank regulations to cool down consumer
and credit card loan growth.
Figure 3
Quarterly credit card transaction volume in Turkey
from 2015 to 2024 (in millions)
2,500
2,000
1,500
1,000
500
0
Q1 2015
Q1 2016
Q1 2017
Q1 2018
Q1 2019
Q1 2020
Q3 2015
Q3 2016
Q3 2017
Q3 2018
Q3 2019
Q3 2020
Q1 2021
Q3 2021
Q1 2022
Q3 2022
Q1 2023
Q3 2023
Q1 2024
Household debt in Turkey, as defined by the Institute of International Finance, was
11.6% of GDP at end-2023, which is well below the emerging-market average (32%).
Nevertheless, banks’ asset quality is expected to deteriorate (see Figure 4), mainly
driven by unsecured retail lending, especially given the recent rapid loan growth, tighter
regulations on credit card spending and slowing economic growth outlook.
ECN1054 FUNDAMENTALS OF ECONOMICS / ECN1034 ECONOMICS FOR BUSINESS 7
ECN1054 / ECN1034 / Final Assessment (MS) / September 2024
Figure 4
Number of people not repaying their credit card debt from 2013 to
2023 (in 1,000s)
1,200
1,000
800
600
400
200
0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Private banks are considerably more exposed to credit cards than state-owned banks,
largely reflecting the latter’s strategic focus on government priorities. Private banks’
credit card exposure was 19.2% of their total loans at end-2023, while state-owned
banks’ exposure was just 4.9%. But the wide margins on credit card products provide
some cushioning against an increase in the cost of risk.
Non-performing loan (NPL) ratios for credit cards (1.5%) and total retail loans (2.0%)
remained comparatively low in the opening months of 2024. They are expected to
increase to over 3% in the next two or three years. Potential further monetary policy
tightening, an economic slowdown or rising unemployment could push NPL ratios
further beyond these levels.
Most large private and state-owned banks have adequate provisioning and capital
buffers to absorb moderate asset quality weakening. Banks have taken steps to
mitigate potential future credit losses. They deployed some of their strong profits in
2023 to strengthen their loan loss provision buffers. At the end of 2023, the sector’s
total reserves coverage of NPLs increased to 244%. Additionally, some banks hold
limited free provisions, which offer an extra layer of protection.
Source: Adapted from Fitch Ratings, 17 April 2024.
Extract 5 Turkish currency crunch
Turkey is historically one of the emerging economies most severely affected by
currency depreciations or devaluations. Recently the country has suffered from
devaluations in 1970, 1979, early 1980s, 1994, and 2001. After the latest devaluation
in 2001, the monetary authorities in the country switched to a floating rate regime.
Turkey is vulnerable to devaluations or large depreciations partly due to its persistent
current account deficit, which in turn is largely caused by the country’s excess of
imports over its exports. This deficit has put consistent pressure on the lira, making
ECN1054 FUNDAMENTALS OF ECONOMICS / ECN1034 ECONOMICS FOR BUSINESS 8
ECN1054 / ECN1034 / Final Assessment (MS) / September 2024
imports too expensive for the average citizen, therefore reducing consumption. With
the people’s purchasing power having been consistently reduced, inflation has caused
major problems for those with savings in lira, as well as those who borrowed massively
in dollars owing to the low interest rates and are now unable to meet their payments.
This crisis has lingered owing to the confused and at times unpredictable political
responses by the government.
Confidence in the economy has all but collapsed as a result, with foreign and local
investors pulling their money out of Turkey. Whenever there is a flight to safety in global
financial markets and the US dollar appreciates, the current account deficit gets worse
creating balance of payments issues and the possibility of a currency crash. Making
matters worse, Turkey is a large net importer of oil and gas. Whenever the price of oil
and gas increases, this negatively impacts Turkey’s national economy and the balance
sheets of Turkish companies. Persistent inflationary pressures have also forced
domestic residents to increase their holdings of foreign currency, which has put further
pressure on the lira.
Since 2018 Turkey has been experiencing very frequent depreciation pressures. One
factor that has recently weakened the country’s balance of payment account is the
expansionary interest rate policy adopted by the central bank. Despite constantly
increasing levels of inflation in the past four years, it has set the policy interest rate
low. As a result, the real interest rate has gradually declined, making Turkey an
unattractive market to foreign investors. As the demand for Turkish lira by foreign
investors declined, the depreciation in the currency became more rapid.
The central bank responded by using significant amounts of foreign currency reserves
to prevent the lira from depreciating further. However, since May 2023, it began to
change tack, more than quadrupling interest rates and scaling back interventions to
defend the currency.
Source: Adapted from Journal of International Financial Markets,
Institutions and Money, June 2023.
3 Do you consider rapidly growing retail credit card lending a matter of concern for
Turkey’s banking sector and broader economy? [50 marks]
4 How do expansionary monetary policy, current account deficit and a collapse in
market confidence contribute to the depreciation of Turkish lira? [50 marks]
ECN1054 FUNDAMENTALS OF ECONOMICS / ECN1034 ECONOMICS FOR BUSINESS 9
ECN1054 / ECN1034 / Final Assessment (MS) / September 2024
Note
The following supporting materials are provided to guide your reading, research
and understanding. They are not exhaustive. You are at liberty to explore and
consult other credible sources to assist in your writing, where necessary.
Videos
How bad can inflation be? Turkey offers a warning.
Source: Wall Street Journal on YouTube, 15 December 2021.
How Turkey has been going on?
Source: Economics Explained, 27 June 2024.
Turkey’s inflation hits 19-year high.
Source: Bloomberg Markets and Finance, 3 February 2022.
Articles
Turkish inflation hits highest since 2002 amid Lira woes.
Source: Bloomberg, 3 January 2022.
Turkey’s annual inflation rate is over 82%, finds research group.
Source: Bianet, 3 January 2022.
How Turkey can overcome its economic challenges
Source: Arab News, 2 January 2022.
Turkey cuts interest rates despite spiralling inflation.
Source: BBC News, 16 December 2021.
Turkey raises minimum wage as lira crash, inflation sow hardship.
Source: Aljazeera, 16 December 2021.
Erdoğan gambles on economy amid protests and rocketing inflation.
Source: The Guardian, 24 November 2021.
Turkey's inflation tops 61% as surging oil prices worsen outlook.
Source: Bloomberg, 3 October 2023.
Soaring inflation and a collapsing currency: Why is Turkey’s economy in such a
mess?
Source: Euro News, 9 November 2022.
Turkey’s looming economic and financial crisis.
Source: Open Canada, 15 January 2024.
ECN1054 FUNDAMENTALS OF ECONOMICS / ECN1034 ECONOMICS FOR BUSINESS 10
ECN1054 / ECN1034 / Final Assessment (MS) / September 2024
Why Turkey’s currency is crashing after Erdoğan got reelected
Source: AP, 9 June 2023.
Turkey’s inflation climbs to 68.5% despite continued rate hikes.
Source: CNBC, 3 April 2024.
END OF PAPER
ECN1054 FUNDAMENTALS OF ECONOMICS / ECN1034 ECONOMICS FOR BUSINESS 11
