Turkey is facing one of the most serious monetary crises of its recent history. Are Erdoğan’s populist politics to blame?
Turkish President Recep Tayyip Erdoğan has increasingly turned to populist tactics as a diversion from the endemic economic problems that are affecting Turkey. His political discourse has focused on three main pillars: a strong economy, strong parliament and the fight against terrorism. Erdoğan has repeatedly drawn attention to the spectrum of threats on Turkey’s borders, finally initiating military operations in Syria in recent months. He has now also flagged up a possible international conspiracy against the Turkish lira, asking citizens to exchange their reserves of dollars in order to save the lira from the collapse.
A plunge in Turkish Lira value
However, these issues have a much simpler explanation than a grand international conspiracy. The Turkish “economic miracle”, so often touted by the government to impress voters, is looking less and less miraculous. The rate of economic growth, which peaked at 7.4% in 2017, quite simply did not rest on a solid foundation.
Perhaps anticipating the inevitable, in April the Turkish president decided to move the parliamentary and presidential elections forward by a year and a half, to 24 June. It could be a desperate attempt to consolidate power in a country that is growing skeptical about its economic renaissance.
Meanwhile the Turkish lira continues to plummet (-19% in the last month, -34% over the year). And when on 23 May the lira hit the all-time low rate to the dollar, losing 5% in a day, the Central Bank – until then careful in acquiescing to the President – could do nothing but raise rates by 300 basis points to 16.5 percent. For Erdoğan, the vocal supporter of an expansionary monetary policy, it was a blow. But it may still not be enough to curb the lira devaluation. The risk of an unprecedented economic crisis is real, and Turkish companies that have borrowed foreign currency loans will struggle to cope with hard currency debt.
Enterprises and entrepreneurs
Rising to power as Prime Minister in 2003, Erdoğan oversaw Turkey’s transformation into a world economic power. In 10 years, the GDP per capita had quadrupled to 10,000 dollars, bringing millions of Turks out of poverty. These results were driven mainly by state-subsidized loans to business, and incentives for small and medium enterprises – the so-called Anatolian Tigers. Large public infrastructure projects were launched, offering vast sub-contracting opportunities to the private sector. But 15 years of populist economic policy comes at a price.
A few numbers are sufficient to outline an alarming scenario. The current account deficit rose to $ 55.4 billion in March 2018, close to 6% of GDP; twelve months earlier it was at $47.4 billion. Inflation, the biggest threat, has already reached 11% and is expected to remain at this level for 2018. The industrial sectors that drove the first stages of Turkish growth could be at risk, especially the construction sector, retail, manufacturing, real estate and technology, which are highly dependent on imports.
What next?
If we consider that Turkey’s external financial requirement for 2018 will be $222 billion, its foreign currency reserves look inadequate to the challenges that the country will have to face in the next few months. The first victims of Turkish currency volatility may well be the small and medium enterprises that have been the of the Turkish economic miracle. If the lira devaluation continues, many of the Turkish companies which have foreign currency debts would face a severe difficulty in repaying them. Turkish private citizens are trying to convert their savings in Dollars or Euro in order to defend themselves against inflation. Private companies, whose foreign net deficits amount to 223 billion dollars, are doing the same to minimize future risks.
Exacerbating this situation, the unemployment rate has been growing fast since the first quarter of 2017. Every year at least 500,000 more people are ready to enter the Turkish labor market. To absorb them would require a constant growth of 5% of GDP for several years. Meeting this target in turn requires greater foreign currency liquidity and a substantial increase in foreign investments – but these are precisely the economic parameters that are shrinking dramatically.
It seems like a perfect storm is falling on Turkey; the Turkish economic miracle may reach its end earlier than expected.
