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Turkey’s Recession Spells Danger for Its Neighbors and Friends

Its days of self-confidence based on strong economic growth are past and what’s left is Erdogan’s dangerous paranoia

David Rosenberg
David Rosenberg
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Supporters welcome Turkish President Recep Tayyip Erdogan at an election rally in Sarajevo, Bosnia, May 2018.
Turkey has officially tipped into recessionCredit: Michael Colborne
David Rosenberg
David Rosenberg

The news on Monday that Turkey slipped into recession hardly comes as surprise, given its economy's downward trajectory since mid-2018. The question is how long the pain will last, what the recession means for Turkey’s fearless leader Recep Tayyip Erdogan – and its possible impact on the country’s neighbors, not the least Israel.

Turkish GDP fell 2.4% in the final quarter of 2018 , compared with the previous quarter – when it contracted by1.6%. Two consecutive quarters of declining output is the widely accept definition of a recession, but for Turkey that’s just one unhappy metric. The country is also reeling from double-digit inflation, rising unemployment, and growing numbers of bankruptcies.

Berat Albayrak, who does double duty as Turkey’s finance minister and Erdogan’s son-in-law, said on Monday that the worst is over. That’s not to be taken any more seriously than the conspiracy theories that he and his dad regularly proffer to explain Turkey’s travails.

There are some forecasters, such as the Organization for Economic Cooperation and Development, with no family ties to the president, who are relatively sanguine about Turkey’s ability to bounce back quickly, as it has in the past from downturns. Its GDP will contract 1.8% this year but will expand 3.2% in 2020, the OECD said in its latest forecast. It even raised its 2020 estimate.

Personally, I go with the forecasters who are less optimistic: Capital Economics, the bear-est of the them all, thinks Turkey will see a 2.5% drop in output this year; Oxford Economics sees a 1.4% contraction. A poll of economists by Bloomberg sees Turkey’s economy continuing to shrink in the first half of this year followed by “tepid” growth over the next four quarters.

Meet the bear

The reason to be bearish is that Turkey’s pre-crash economic miracle was fueled by debt, nearly all of it foreign debt taken on by banks and big corporations. Those days are over. The 2008 financial crisis led to a unique era of provident fund supercheap money and strong global economic growth. Going forward, the world economy will either see interest rates rise or (as is becoming the more likely scenario) growth will be sluggish, or even worse.

Add in the fact that Turkish businesses will be weighed down by the need to pay down a good part of their $250 billion debt pile (equal to a third of the economy), and you see the catalysts aren’t there for the miracle to pick up where it left off.

Turkey has some good fundamentals -- a large domestic market and labor force and talented entrepreneurs -- but that isn’t enough, especially if Erdogan is determined to lead the country in the direction of crony capitalism and conflict with his natural partners, such as the United States and Israel, to name two.

Unusually for an economy the size and sophistication of Turkey’s, everything hinges on the personality of one man.

It was Erdogan’s infatuation with cheap and easy borrowing -- and his decision to encourage it against the advice of virtually everyone else -- that created the economic miracle, and then destroyed it. It was Erdogan who opted for a policy of confrontation with the U.S. that led Trump to punish the country via trade. It is Erdogan who has prevented Turkey from becoming a part of the emerging East Mediterranean gas hub.

If anything, his power over the economy is growing. Since last June’s election he has strengthened his grip over the key policy-making institutions. His ability to fix things or do even more damage is greater than ever.

Several weeks ago, I suggested that Erdogan might change course and become a kinder, gentler leader, if for no other reason than to unlock international aid.

That seems increasingly unlikely. Campaigning for his AKP party ahead of local elections on March 31, the president is showing no shame for the errors that pushed his country into recession. Instead he is employing his traditional rhetoric of paranoia, blaming foreign conspiracies and greedy businessmen.

That kind of strategy has worked well with Turkish voters in the past. But even if it doesn’t succeed so well this time and the AKP performs badly at the polls, Erdogan doesn’t have any compelling reason to change: He and the AKP don’t face the voters again until 2023.

Anyhow, illiberal leaders in the Erdogan mold don’t premise their popularity on the meat-and-potato issues of jobs and rising living standards, as run-of-the-mill elected officials do. As Turkey’s troubles continue, I think we can count on Erdogan to become even more aggressive towards his political opponents at home and his perceived enemies abroad. It hits the sweet spot where his own natural inclinations and Turkish voters’ emotions intersect.

If so, this isn’t going to be good news for Turks or their neighbors. Erdogan’s assault on law and democracy will continue unabated, his military forays will become more adventurous and risky, and his hostile policies toward his East Mediterranean neighbors will grow. Without the old salve of knowing it was a rising economic power, Erdogan’s Turkey will be an angry and dangerous country.

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