Trump Doubles Down on Erdogan, and Turkey’s Economy Is Hurting Bad

The growth years are set to succumb to a new era of debt and distress, forcing the country to look inward and maybe even dispense with Erdogan

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Turkish President Recep Tayyip Erdogan and members of the Supreme Military Council stand after laying a wreath during a visit of Anitkabir, the mausoleum of Mustafa Kemal Ataturk, August 2, 2018.
Turkish President Recep Tayyip Erdogan and members of the Supreme Military Council stand after laying a wreath during a visit of Anitkabir, the mausoleum of Mustafa Kemal Ataturk, August 2, 2018.Credit: AFP
David Rosenberg
David Rosenberg

>> UPDATE: Follow the latest developments on Trump and Turkey, U.S. imposes tariffs on Turkish imports

One of Israel’s frustrations with Turkish President Recep Tayyip Erdogan wasn’t just his visceral dislike of the Jewish state but the fact that he was presiding over a country with growing economic and military power and pretensions to regional leadership. Erdogan wasn’t only an enemy but an increasingly powerful one.

Those days are now coming to an end. Erdogan may remain an enemy, at least in terms of inflammatory rhetoric, but Turkey’s economy is rapidly going down the drain and with it will go his ability to influence events in the region.

>>Turkey's Erdogan and Trump are in a chess match, but neither has the temperament to play

The Turkish economic miracle that Erdogan was given credit for over the last decade and a half was more an illusion than reality. The economy grew rapidly, at times at a pace that exceeded China’s, but its foundation was faulty.

The expansion was financed by an influx of foreign capital, which was readily available and extraordinarily cheap in the post-2008 era of low interest rates. But instead of investing in machinery and equipment, research and development, and education to raise productivity levels, the money was used to finance construction projects that were increasingly grandiose and gave little back to the economy.

When the 2016 abortive coup threatened to undermine growth, Erdogan propped it up with generous government-guaranteed loans to business and a revision of the way the government processes official economic data.

In this year’s first quarter, gross domestic product grew 7.4%, and that’s the way the leader likes it. Erdogan’s ability to stay in office since 2002 and enhance his power through the 2018 referendum amending the constitution was as much about his ability to deliver sustained economic growth as it was about restoring the place of Islam in Turkish life.

As it turns out, the Islam stuff was secondary to Erdogan’s real agenda, which is above all about amassing power. Keeping the economy growing through a formula of borrowing, building and (consumer) binging is the way to do that. But the formula by its very nature has a limited shelf life and that has come due.

Not all of the emerging disaster is Erdogan’s fault, but nearly all of it is, especially since he now has nearly unlimited power over the economy and has used it to impose his unorthodox views, such as that high interest rates increase inflation.

Global interest rates are rising, which makes it less attractive for foreign investors to put their money in Turkey. True, Turkey has raised interest rates, but it has been an exercise of too little too late, presumably because of Erdogan’s baleful intervention.

Foreigners are taking their money out of Turkey and so are Turks (by one estimate 12% of the country’s rich left last year). Like foreign investors, they’ve been put off by growing corruption and economic mismanagement under Erdogan.

The capital flight has left the lira down more than 30% this year and left Turkish companies with growing dollar-denominated debt that many will not be able to pay. If the currency losses another 25% of its value, Turkey’s banks will have no capital cushion left to face defaults. Add to that the Trump White House’s decision to impose financial sanctions on two cabinet ministers and a threat to halt Turkey’s duty-free access to U.S. markets.

It’s hard to picture a scenario where this doesn’t all end in a crash landing for the Turkish economy. Raising interest rates would stop the lira from spiraling downward but would cause economic growth to collapse. Erdogan doesn’t seem to have the personality traits that would let him make amends with the United States, admit his mistakes and defer to others on economic policy or negotiate (as he might have to) concessions in exchange for a bailout from the International Monetary Fund. In any case, an IMF bailout would put an end to the Turkish miracle.

It would be foolish to try to predict how Erdogan and the Turkish people would respond to the crisis. For now, it seems Turks are buying the story that the crisis is all part of a conspiracy against their country and are standing behind the president. Maybe when the extent of the debacle becomes apparent they’ll turn on him and the Erdogan era will end to the relief of Israel and many others.

Either way, the muscular Turkey we had come to know during the Erdogan era is over. Ankara will be much more preoccupied with debts and the economy than with dreams about reviving Ottoman glory and power. It may even choose to make amends with its old enemy Israel.

Finally, I offer an unpleasant reminder to Israelis who will be celebrating Erdogan’s woes, in particular the Israeli right and its fantasy of Donald Trump as the tried and true friend of Israel.

The reason Washington imposed sanctions on Turkey is that Erdogan was playing games on a deal Trump believed had been sealed to release the imprisoned American pastor Andrew Brunson. Trump is enamored of strongmen like the Turkish leader, but more than he likes quasi-dictators he likes to do deals. Erdogan committed a grave sin in Trump’s eyes and is being made to pay heavily.

Now, when you think of people who specialize in double-dealing, the leader of another eastern Mediterranean country immediately comes to mind. If the Trump peace plan ever gets off the ground, which is by no means a given, the Benjamin Netanyahu-Donald Trump bromance could come crashing down.

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