Erdogan has pulled the wrong policy levers and now voters are feeling the squeezeby Fadi Hakura / June 21, 2018 / Leave a comment
Turkey is in the midst of a heated presidential and parliamentary elections campaign. The votes are scheduled for 24th June but will take place against a deeply troubling economic backdrop: the Lira is plumetting and there is double-digit inflation.
So what’s going on? President Recep Tayyip Erdogan has pumped gargantuan amounts of cheap credit into the Turkish economy, loosened fiscal expenditure, relaxed monetary policy and boosted tax incentives to generate an impressive-sounding growth rate of 7.4 per cent last year.
Lurking below the surface, however, are warning signs of impending economic dangers. Total debt has exploded from less than one third to nearly three quarters of the national economy since 2008. More than half of that debt is denominated in foreign currency and much of it is held by the private sector.
Turkey has essentially been importing tens of billions of dollars each year to finance a credit-fuelled, consumption-driven economic model. It has funded mega-infrastructure projects and rampant construction.
Erdogan was determined to accelerate growth substantially beyond the capacity of the Turkish economy, a bit like spiking the fuel of a mid-sized Audi car so that it speeds like a Ferrari. As any competent mechanic knows, these tactics do not work in the long-term. Eventually, the engine will burn out.
In Turkey’s case, financial markets expected the central bank to hike interest rates to cool down the overheating, rein in unsustainable growth rates and bring down higher inflation in favour of economic stability.
But Erdogan blocked the central bank from raising interest rates until recently, and may return to that position again before too long. He believes that higher rates contribute to higher inflation rather than the other way around and has even called them “the mother of all evil.” His unorthodox policy stance and penchant for one-man rule scared investors and worsened the devaluation of the Turkish Lira. That forced major Turkish companies to renegotiate their dollar or euro loans, since they earn revenue in the less valuable Lira but have to repay loans in hard currency. Whether this represents the canary in the coalmine of future financial troubles remains to be seen.