Turkey’s economic crisis tests Erdoğan’s power

For his part, Erdoğan is pulling out every trick in the handbook of strongmen under pressure: He's blaming others, pointing his finger at outside forces, calling for a new era of national unity and sacrifice, sacking ministers and officials, cracking down on protests, distracting the public with foreign adventures, pleading for bailouts from allies and even old rivals, and concocting economic solutions on the fly to keep his country from sliding into chaos.

In the past two years, after Turkey's economic woes began in 2018, Erdoğan has replaced the central bank governor three times. Thursday saw the chief of the Turkish Statistical Institute, Sait Erdal Dincer, thrown overboard and fired after his agency, known as TurkStat, released new – and still bad – inflation figures.

Aba said Erdoğan's Justice and Development party – widely known as AKP, its Turkish initials – came to power at a moment when major central banks were lowering their interest rates to offset the sharp economic downturn caused by the bursting of the dot-com bubble and the Sept. 11 terrorist attacks in 2001.

“There was a glut of savings and cheap credit,” Aba said. “AKP got very lucky to have taken power during this period.”

In the ensuing years, AKP feasted on cheap foreign investment and poured cash into construction projects in a bid to modernize Turkey and make Turks see in Erdoğan their great leader.

Construction, Aba said, “is the easiest way to trigger economic growth.”

But he added that this economic model has run out of tarmac.

“It helps the economy in the short run but to sustain the growth you have to keep the construction economy going,” he said. “This led to concretion in the big cities. Wasteful projects such as idle bridges, airports, roads and such.”

At the same time, he said Turkey's industrial sector became addicted to cheap imported raw materials and goods due to Turkey's overvalued lira and an undervalued dollar.

“This led to persistent trade deficits,” he said.

All of this, though, was sowing the seeds for Turkey's current crisis: As Turkish businesses imported their needs, the country's homegrown industries nodded off to sleep. Meanwhile, Erdoğan oversaw a wave of privatization of national enterprises and public spaces.

When central banks started to raise interest rates around 2006 as the world economy heated up again, making borrowing more costly, Erdoğan ordered Turkey's central bank to lower its rates to keep the tap of cheap foreign investment on and to keep the construction boom going.

There were other motives, too, for his fiscal policies. Erdoğan's circle of power was made up of companies, financiers, businessmen, friends and family members getting rich from the construction bonanza. It was a simple enough equation then: He kept the boom going with low interest rates and in turn kept getting reelected.

“And this worked, until now,” Aba said. An economy based around construction has its limits, he added.

“In some cities there are more houses than households,” he said. “There was an overproduction. The gap was partially closed by selling the new and modern residences to foreigners. But it wasn’t enough.”

The years of low interest rates have landed the Turkish lira in its current morass, he said, where it's depreciated and causing record inflation.

In sum, Turkey is finding it hard to find much else to build, economic growth has slowed, unemployment grown and anger mounted in recent years.

To shore up the lira, Erdoğan has burned through the nation's dollar reserves and Ankara now finds itself about $60 billion in the red. With Western capital flowing out, Erdoğan has turned to the United Arab Emirates, an old rival, and Qatar for cash lifelines.

Erdoğan's strategy is to right the economic crisis through a new national plan to foster politico-economic autonomy in order to revive Turkey's domestic production and make the country once again an export nation.

Erdoğan is listening to Cemil Ertem, his chief economic adviser. Ertem, according to the Middle East Eye news outlet, argues that Turkey needs to increase its exports and decrease imports through a policy of keeping interest rates low.

“He believes it will make Turkish exports more competitive with a depreciated lira,” the Middle East Eye reported, citing a policy paper it obtained written by Ertem.

Erdğan is calling on Turks to endure the hardships and argues the country must shift course.

“Of course we know that price rises are causing problems in the daily lives of our people. Of course we are aware of the volatility in the exchange rate, the instability in prices and the uncertainty this creates,” Erdoğan said in late December in a speech, as reported by the Financial Times. “But we will resist these just as we resisted tutelage, terrorist organizations, putschists and global power barons. I am telling you, there is no going back.”

There are indications his economic strategy may be paying off. A weaker lira likely is behind a substantial rise of exports in November and December, unemployment has dipped slightly and gross domestic product is edging up.

Can this “Erdonomics” model defy the forecasts of economists who warn Erdoğan's policies will create runaway inflation and financial chaos in a country so dependent on foreign investment?

Economists doubt it. Timothy Ash, an expert on Turkey's economy at BlueBay Asset Management, said the country is at risk of seeing inflation spiral out of control.

“Inflation is out of the bag, the competitive advantage will go out of the window and we are in a devaluation inflation spiral,” Ash recently told the Financial Times.

Economists also say Erdoğan doesn't really have a long-range industrial plan and warn that trashing the lira is unlikely to lead to the kind of big gains in productivity that the president and his advisers envision. Turkish business associations, meanwhile, are growing more upset at the instability.

“Erdogan’s room for economic maneuver is getting narrower and narrower,” Aba said.

In December, Erdoğan managed to stabilize the lira through a scheme encouraging Turks to convert their foreign currencies into lira and deposit them in savings accounts backed by Turkish treasury guarantees. Deposits in these accounts are guaranteed to get the same or better returns than if they are put into foreign exchange markets.

This anti-dollarization scheme was dubbed by some the “Turkish dollar.” But some analysts saw this as a reckless back-door interest hike that unfairly transferred financial risks to the general public.

“But this cannot last forever. Every time he saves the day with a palliative solution, the systemic risk of implosion is increasing,” Aba said. “He is hoping that he can carry the economy like this until the election and win another term. It worked before, at least three times. But I do not think it’s going to work this time.”

Courthouse News reporter Cain Burdeau is based in the European Union.

Follow @cainburdeau

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