Turkey, Economy and Elections

The economy will play a key role in the Turkish elections on Sunday 24 June. We discussed the current economic situation and its future perspectives with Professor Gül Günver Turan, president of the "Turkey - European Union" Association, retired professor of Economics at the University of Istanbul

Prof. Turan, which are the current strenghts and weaknesses of the Turkish economy?

When looking back at recessions and financial crises the Turkish economy has been through in the past, the following trait stands out: resilience, characterized by a readiness for revitalization and recovery. Add a strong belief in the future, strong entrepreneurial spirit, a business-friendly environment, readiness to use new technologies, an energetic workforce, close family ties allowing for support systems to operate, all allowing recovery to be more rapid than expected. This ability to withstand and cope with shocks is unfortunately hampered today by vulnerabilities caused by both external and internal economic shocks. These shocks are not only a result of intrinsic features of Turkey’s economy but are also due to a lack of good governance and sound macroeconomic management.

Turkey is an export-oriented economy, easily affected by external shocks such as sudden drops in foreign demand. Its domestic economy is dependent on strategic imports such as gas, oil and raw materials, whose prices are currently on the rise. The resulting current account deficit amounts to 57 billion dollars between March 2017 and 2018. Low domestic savings has led to high dependency on foreign savings. Foreign direct investments and portfolio investments are not as high as may have been wished, constituting a major problem at a time when repayment of foreign debt in 2018 amounts to 240 billion dollars. To make things worse, domestic capital outflow has increased, while Turkish firms operating abroad have become more reluctant to send their earnings back to Turkey. Shortage of hard currency is also exacerbated by the perception by both domestic and foreign actors that there is a weakening of the rule of law and deterioration of the judicial processes. 

How can the current weakness of the Turkish lira be explained?

It can be explained by the large amount of foreign debt, an increasing current account deficit, low rates of foreign direct and portfolio investments and fear of the future, while the Central Bank remains dormant. Article 4, part II of the Law on the Central Bank of Turkey, defining the “Fundamental Powers of the Bank”, stipulates that the Bank, with the objective of maintaining price stability, shall be authorized to use monetary policy instruments described in this law. De jure the Central Bank is independent, but de facto it has taken its clues from President Erdoğan who favours the lowering of interest rates. His insistence that inflation is a result of high interest rates and therefore interest rates should be lowered has accelerated the run on the currency. At a time when there is an increasing demand for foreign exchange and interest rates are below inflation rates, the logic of economics would dictate a rise rather than a drop in the interest rates.

Eventually, the Central Bank raised the interests twice last weeks. Why precisely now? And what did President Erdogan mean when he spoke about bringing monetary policy more under the government’s control? With what consequences?

It is only when the Turkish Lira (TL) hit a record low of 4.9290 against the US dollar that the Central Bank finally decided on tightening monetary policy and raised interest rates. The President’s recent declaration that he would take greater control over monetary policy after the presidential and parliamentary election has once again speeded the selling of TL holdings, but the Central Bank’s determined stand and its increasing of rates a second time have helped a modest recovery of the TL. How long lived this will be we shall see, the trend is presently upward. After all, the fever (inflation) is not yet down, but at least the thermometer (interest rate) is now allowed to show how high this fever is. Can we attribute any logical meaning to what was said by the President during a political rally? It is as if he wished exchange rates to skyrocket again...It may be that he was misguided by his personal economic advisors who thought that Neo-Fisherism could apply to Turkey, characterized by an overheated economy with high rate of inflation and in great need of foreign exchange.

What part of the Turkish society is at the moment suffering the most and what part is gaining advantages?

The burden of businesses who had contracted foreign debt denominated in dollars or euros has now increased. The State itself faces the same problem when repaying public debt. Export and imports can both be negatively affected by the depreciation of the TL since the exchange elasticity is negative. Gas, oil and raw material imports have become more expensive which will fuel even more inflation in the coming months.

A report published by DISK (Confederation of Progressive Trade Unions of Turkey) entitled “Labour under the AKP” emphasizes that trade union rights were violated, strikes prohibited, social security benefits reduced, income distribution deteriorated unfavorably against workers, unemployment grew, the tax burden of workers has increased as indicated by the share of indirect taxes in total taxes going up to 65% in 2017. We can, therefore, say that the income of Turkey’s low-income groups has not improved. Any winners? These days, there seem to be more losers than winners, except for those who held their earnings and savings in gold and/or foreign exchange.

Why is the government insisting so much in pursuing economic growth despite its high costs in term of inflation and the loss of value of the currency?

The insistence is due to the obligation the President feels to realize the “Vision 2023” plan he had made public in 2011. The vision consists of a list of economic, political and social goals to be achieved by 2023, the centennial of the Republic. The major economic goals were to move up Turkey from a middle income to a high income country with a GDP per capita of 25,000 dollars, allowing Turkey to become the 10th largest economy in the world, tripling its exports to 500 billion US dollars, develop ten globally recognized Turkish brands and complete accession negotiations with the EU.

All considered Turkey is far from achieving these goals. We are in an election year and the government, naturally wishing to win the elections, can not afford to tell its constituencies that this growth is only temporary and that inflation can only be controlled if growth rates are lowered. Ensuring sustainability of high growth rates can only be achieved with higher domestic saving rates, higher investments and less dependency on foreign capital inflows.

President Erdoğan also voiced the possibility of the creation of a national rating agency. How would you evaluate this move?

In March 2018 the Head of the Banking Regulation and Supervision Agency (BDDK), at a press review also talked about the establishment by Turkish banks of such a credit rating agency which would become operational within a few years. Would such a national agency be truly independent, impartial and in compliance with international standards, would it be trusted by international investors if its reports contradict those prepared by international rating agencies, I seriously doubt it.

Is Erdoğan consciously putting Turkey's economy in a dire situation in order to pursue an ideological agenda that aims at severing the bonds with the West?

I do not think that this is his current agenda. He has realized now that not much can be achieved by siding up solely with the Sunni Arab world, that Russia by itself is not a reliable party, that China has still a long way to go and that Africa is still too small a market. He also realizes how costly it can be to severe bonds with the West since 70% of foreign direct investments comes from the EU, since around 50% of trade is conducted with it, and since recent polls indicate that more than 78% of the Turkish people wish for the continuation of accession negotiations with the EU. Authoritarian leaders have a tendency to behave alike and opportunistic behaviour is a characteristic of the political arena in the contemporary world.

Were early elections called in by the government as an attempt to secure the control over the state before Turkey enters the storm of an economic crisis?

Polls showed a decline in the support for the AKP and the popularity of the President while economic indicators gave signs of a turbulence which would require drastic contractionary policies. The President announced that early elections would be held on June 24 to mitigate these fall-outs. If the coalition formed by the AKP (Justice and Development Party) and MHP (Nationalist Action Party) wins the election, the constitutional referendum passed last year will allow them to move to a presidential system where the president’s power is increased, the prime ministry and council of ministers is eliminated and the powers of the parliament weakened.

What should be Turkey's priorities in terms of economic reforms?

Difficult days await Turkey and whoever wins the elections will be facing difficult problems and challenges. The Central Bank seems to have lost its credibility. It has acted too slowly to rein in inflation and protect the TL. The Treasury’s credibility is also in question. Turkey has become too dependent on short-term external funds with maturation dates of less than a year. The other required political and economic reforms are improvement of the judicial system, bringing down inflation and interest rates below the 5% level, promoting investments in high valued products and increase the share of high tech exports, promoting policies to increase investment in R&D, increasing corporate and household saving rates, reducing bureaucracy and red tape. The list could be longer. Discussions in business and financial circles centre on who will be responsible for the conduct of the economy after the elections. Presently none of the presidential candidates has disclosed the economy team they will be working with. Much await to be disclosed and done.