How Turkey's lita crisis has affected Istanbul's skyline

Looking from afar, Esenyut, a new neighborhood on the outskirts of Istanbul, looks a bit like Hong Kong or Dubai, with a bustling center of gleaming skyscrapers.

When you look closer, however, you notice that building after building remains unfinished, with no windows or furniture; other buildings are only half occupied, and windows are in darkness after evening falls.

"In residential areas, construction has stopped 100 percent," says Mohammed Karman, a local real estate agent, from his small office in Esenyut's central square. "You know why? Materials. Everything is in dollars, you pay in dollars. "

The fall of the Turkish lira last week after two years of steady decline spooked global markets, but no one looking over the Istanbul horizon was surprised by the situation. Everywhere you look in the city you can find evidence of a debt-fueled construction boom: new skyscrapers frame the skyline, huge shopping centers abound on the streets, and among several megaprojects is a new airport that is set to become the world's largest.

Financing this construction frenzy has become the backbone of Turkey's economy, accounting for up to 20 percent of the country's GDP growth in recent years and putting some two million people to work. Similar to the financial crash of 2008, growth was driven by favorable borrowing and debt accumulation. Developers have been financing their buildings through cheap foreign currency loans - and they will suffer particular losses due to the collapse of the lira as these loans become harder to repay on a daily basis. According to government statistics at the end of 2016, about 90 percent of all lending in Turkish construction was done with foreign currency loans.

The currency's fall was driven by bickering with the U.S. government over the ongoing imprisonment of American pastor Andrew Brunson by Turkey, who is accused of involvement in a 2016 coup attempt. However, the Turkish economy has been in a slowdown in recent years, steadily sliding downward since 2016.

"Turkey is a country that is trying to achieve high growth but does not have enough foreign capital to achieve that goal," said Nihat Bulent Gültekin, former head of the Turkish Central Bank and a professor of finance at the Wharton School at the University of Pennsylvania. "If they don't export from time to time, they face a crisis. It happens about every 10 years.".

The construction industry is a great example of this dependency. Most of its capital comes in the form of foreign currency-denominated loans. Istanbul's Sapphire Tower - one of the tallest buildings in Europe when completed in 2011 - was financed with loans worth 164 million. liras in 2013, 154 mln. of which were in U.S. dollars. That loan will now cost about 539 million. lir.

Turkey is also heavily reliant on imports of construction materials: it is the world's ninth largest importer of steel, paying $8 billion in 2016, which rose to $9 billion in 2017 as the lira began to fall.

This is why Turkey's economy's reliance on the construction sector for growth is particularly dangerous.