President Recep Tayyip Erdogan is jeopardizing Turkey’s economy by pursuing an unorthodox economic policy in the hope that he can reverse his slide in the opinion polls and keep his chances of re-election alive ahead of elections in 2023, says Tim Ash, emerging market sovereign strategist at BlueBay Asset Management in London.
Ash describes the conditions that make capital controls on the Turkish economy a possibility. That is, despite the broader momentum of the country’s economy, which is being undermined by Erdogan’s insistence on rate cuts.
He speaks critically of the “poor advisers” around the Turkish strongman, while expressing concern that the situation could lead to a Lebanon-style crisis.
Cοuld you explain in a few words what exactly is happening in the Turkish economy today?
Erdogan runs classic stop-go economic policies linked to the political cycle. Elections are due by June 23. He is struggling in the polls so tries to use economic levers to win popularity. This means typically loose credit policies which buoy import demand and keep the trade and current account deficits elevated, and this puts pressure on the lira. The added complication is his religious views on interest rates – he opposes usury. This means the Central Bank of the Republic of Turkey cannot hike policy rates to slow import demand, which means the lira has to adjust weaker to close the external financing gap. The weaker lira just fuels inflation, which erodes competitiveness, and we end up in inflation-devaluation spirals.
How serious is this crisis? What is the danger for the Turkish economy today and how likely is the scenario of capital controls in Turkey?
I worry about a systemic crisis, including capital controls. If you cannot use interest rates and won’t go to the International Monetary Fund, the risk is of a hyperinflation-devaluation spiral where people lose confidence in the lira and banks. The only option then is capital controls. An added complication is the CBRT has limited FX reserve buffers and net reserves are heavily negative – likely $60-70 billion. So the CBRT is spending other people’s money. When the population realizes that, we might end up in a Lebanon-style crisis and run on banks.
But the Turkish economy is achieving positive growth rates. In fact, it was one of the few countries in the world with growth in 2020, a year of lockdowns. In addition, its public debt is no more than 40% of GDP and its budget deficit appears manageable, at 5% of GDP. So, is it a mixed picture when you analyze the course of the Turkish economy?
No, you are right – there are positives and some durability here. The economy is delivering high growth – likely 10% in 2021 – but at the price of high inflation, 36% in December. So people don’t feel better off. It eats away at living standards.
In the meanwhile, is the devaluation of the lira boosting the competitiveness of Turkish exports? Is that a positive side effect of an unorthodox policy?
The lira might be cheap, but not for long with high inflation.
What mistakes is Erdogan making? What is he thinking?
It’s his obsession with interest rates. If Turkey had a decent central bank governor, able to set rates independently, I think Turkey could rebound quickly. You mentioned the positives, including low public debt, good demographics, decent banks and corporations, good location and a strong manufacturing base. Entrepreneurial pro-business culture. Turkey should be a success story. But Erdogan has his head in the sand, and has poor advisers around him. There are very few checks and balances to prevent policy mistakes.
What do the markets think of Turkey today? Have they lost confidence in the country or are they still waiting?
I think they are hoping elections bring policy change and orthodox policy. Most foreign investors have reduced positions and are on the sidelines waiting for change.
Would you say that the latest developments undermine Turkey’s perspective as a member of the G20? Or does Erdoganomics still have room for experimentation in practice?
Post-Erdogan I think Turkey can bounce back quickly.