Turkey on the way of recession?

The road ahead for Turkey isn’t pretty. Alongside downgrades from ratings agencies Moody’s and S&P moving Turkey’s debt closer into non-investment — or junk — territory, experts now predict a recession within the next year.

“The downgrade reflects our expectation that the extreme volatility of the Turkish lira and the resulting projected sharp balance of payments adjustment will undermine Turkey’s economy,” S&P Global Ratings said in a statement Friday. “We forecast a recession next year.”

A recession in the country of 80 million, which sits at the crossroads of Asia and Europe and is home to both NATO’s second-largest military and more than 3.5 million Syrian refugees, would be no small event.

The lira’s roller-coaster moves have knocked hundreds of points off global markets in single trading days, and triggered sell-offs across emerging markets. Turkey comprises 1 percent of global gross domestic product (GDP) and has been making headlines most recently for its heated spat with Washington, with whom it has traded sanctions and tariffs.

The root causes of Turkey’s ongoing currency crisis are domestic, experts say, despite recent jolts from U.S. sanctions and tariffs issued over Ankara’s detention of American pastor Andrew Brunson, held since 2016 on espionage charges he denies.

Prolonged economic overheating, concerns over central bank independence, faulty monetary policy holding down interest rates amid soaring inflation, a gaping current account deficit and heavy external debt have coalesced over several months to pull the country into what analysts have called “a hole of its own making.”

While banking authorities have attempted short-term fixes for the lira, like pledges of liquidity for banks and a halt in offshore currency swaps to stem lira short-selling (traders betting against the currency), the government largely lacks a broader recovery plan. Instead, Erdogan has blamed the U.S. for waging “economic war” against Turkey, likening its “attack” on the lira to attacks on Turkey’s flag or the Islamic call to prayer. Warnings of potential further sanctions by the U.S. Treasury on Ankara have only thrown more uncertainty over the country’s financial trajectory.

Turkey’s already untenable inflation “will peak at 22 percent over the next four months, before subsiding to below 20 percent by mid-2019,” S&P reported as part of its downgrade, highlighting the pressure ahead for Turkish consumers.

While many economists say that contagion to other emerging markets and European banks will be limited, the worst may be yet to come, as market observers see no relief measures in sight from a government choosing to double down rather than de-escalate and heed the advice of worried experts.