President Erdogan’s political calculations and maneuvers are adding to Turkey’s economic decline

Dr Ufuk Gunes Bebek writes for the Birmingham Business School Blog:

The senior advisor to Turkish President Recep Tayyip Erdoğan was blunt in the opening of his column — Turkey’s current economic situation is comparable to that from the attempted coup of 2016: “August 10th has gone down as Turkey’s financial 15th of July in history.”

But Yigit Bulut was not bemoaning the plunge in the value of the Turkish lira, the country’s declining economy, or slumping financial indicators. Instead, he was defending Turkey’s resistance to kneeling down before external powers.

For the Government’s voter base, this is not an entirely unreasonable description of the state of affairs. However, it raises concerns about whether political delusions will bury the underlying issues behind the economic crisis, until it becomes too late to recover.

Deterioration of the Turkish Economy

Long before the most recent slump in the lira, the Turkish economy had begun to deteriorate because of internal trends — i.e. excessive dependence on short-term external funding and a decline in foreign direct investment — and recent global developments such as the tightening monetary policy of the US Federal Reserve. These warranted a reassessment of Turkey’s economic outlook, resulting in a sharp decline in the country’s growth forecasts. The downgrading in ratings of Turkish banks and of debt credit rating followed.

President Erdoğan’s reaction by declaring that his government would conduct an operation against credit rating agencies following the general elections. However, this only brought a decline in the lira relative to the dollar, reaching its lowest point since 2008. Following national elections, Erdogan appointed his son-in-law as the Minister of Treasury and Finance and, with the Presidential decree, seized the right to appoint a monetary authority. These somewhat autocratic decisions, along with the inability of the monetary authority to meet its inflation target, only weakened the credibility of economic policy and increased uncertainty. The Central Bank announced that it will fail to meet its inflation target for three more years, further damaging monetary credibility.

Relationship with the US

These were not the only events feeding the financial catastrophe. Erdoğan’s continuing tension with his US counterpart over Syrian policy, the aftermath of the 2016 coup attempt — which involved the imprisonment of an American pastor on charges of terrorism-related activities — and the trade war have all further unsettled the markets.

Erdoğan is now basing his political discourse on a supposed economic coup d’état. His stronghold is now Turkey’s people with a true God, against Americans with their dollars. This has been highly appreciated by Erdogan’s supporters, with a boycott of American products, destruction of iPhones, and free kebabs to those exchanging their dollars for lira.

Where Does This Lead the Country?

The lira plunged by more than 71% in 2018 compared to the previous year, annual inflation rose to historic levels, and the debt rating has been further downgraded. There has been an inversion of the credit-default swap, indicating immense pressure on the markets and a potential default when Ankara is unable to make the required payments on debt obligations.

Thanks to the somewhat orthodox measures taken by the Central Bank and Qatar’s $15 billion investment pledge, the turbulence has cooled. But in Erdoğan’s Turkey, the underlying issues will not be resolved by save-the-day policies.