Opinion |

Erdogan’s Numbers Racket: Turkey’s Economy Is About to Come Crashing Down

The leader’s addiction to cheap loans and silly ideas about economics are about to cost Turkey heavily

David Rosenberg
David Rosenberg
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Turkish President Tayyip Erdogan greets his supporters from the balcony of his ruling AK Party headquarters in Ankara, Turkey, early June 25, 2018.
Erdogan greets supporters, very early on June 25, 2018Credit: Kayhan Ozer, Presidential Palace/Handout/Reuters
David Rosenberg
David Rosenberg

52.5%. That’s the number Recep Tayyip Erdogan won in the presidential vote on Sunday, and if Turkey were a true democracy, that would be quite a respectable margin of victory. The reelected premier was running against five other candidates. Not only did he win an outright majority: his AKP Party and its rightist partner MHP captured a majority of the parliamentary vote.

Unfortunately Turkey is not a "true democracy" any more. It has slid into the “illiberal democracy” camp. Erdogan’s grip on the media, the judiciary and the state bureaucracy ensured there would be nothing like a fair electoral fight, so the 52.5% is hardly impressive. Though under the new presidential system he engineered, he will be wielding unprecedented power despite that narrow margin.

While the 52.5% isn’t impressive, the other numbers critical to Turkey’s future are downright worrying. Whatever Erdogan’s claims about enhancing the place of Islam in Turkish life, restoring Ottoman glory and turning the country into a regional power under his strong and capable leadership, the real secret to his success has been the country’s economic performance. But, as the numbers below illustrate, Erdogan organized his own re-election just before the economy comes crashing down around him and his supporters.

16%. That’s how much the Turkish lira has depreciated this year. It's as good a barometer as any for the economy. Erdogan and many of his supporters blame the lira’s woes on anyone but Erdogan. It’s the fault of the central bank, foreign conspiracies and international ratings agencies. More factually, it’s the fault of the Turks with money and access to the best information, who have been sending the money abroad because they know keeping in Turkey is a bad bet. Foreigners are responsible to the extent that they have chosen not to throw good money after bad into Turkey. It’s no conspiracy, just common sense.

2.2%. That’s how much the lira strengthened on Monday, apparently on the assumption that an Erdogan victory means political stability for Turkey, especially with his enhanced presidential power. But that won’t last. Everything Erdogan has said (see 17.75% below) on economic matters can only be cause for concern. Maybe with his term in office secured for the new few years and his powers effectively unchallenged, he’ll act more responsibly. But more likely he’ll see it as a carte blanche to pursue his worst ideas.

7.4%. That’s how much the Turkish economy grew last year, making it the top performer in the G-20. But don’t be fooled. The growth was greased by government financial incentives to businesses that were aimed at ensuring a quick recovery from the 2016 abortive coup. Economists are wont to call Turkey’s economy “unbalanced,” by which they mean, it resembles Humpty Dumpty in his final glorious moments. Turkey has enjoyed strong domestic demand but it hasn’t seen the kind of growth in exports it needs to pay for it. Turkey’s current account deficit stood at an uncomfortable 5.6%of GDP at the end of 2017, up from 3.8% a year earlier.

$337 billion. That’s the amount of foreign-currency-denominated debt held by the Turkish private sector, the result of the cheap loans that have been fueling the economy. Corporate debt is equal to 70% of the economy and half of that is in foreign currencies. The weak lira means the private sector will struggle to repay the foreign debts it has run up; and the increasingly precarious state of the economy and high interest rates make it difficult, if not impossible, to roll it over. Ironically, Turkey looks set for an exchange rate crisis like it suffered in 2001 that helped bring Erdogan to power to begin with.

17.75%. That’s what Turkey's benchmark interest rate is right now, which isn’t quite as high as it sounds, considering that inflation is running at 12.15%. But it’s high enough to spoil the secret sauce of Turkey’s growth: cheap loans that make it tempting for businesses to expand and builders to build. Erdogan’s declared solution is to lower interest rates, which he bizarrely says will also lower inflation. What Turkey will get is even more inflation and further currency depreciation, making its troubles even worse.

$15 billion. That’s what it will cost to build a canal linking the Sea of Marmara and Black Sea, the latest and most ambitious of Erdogan’s mega-projects. The cost could end up at more than three times that and the canal serving no useful purpose, except to create a short burst of growth for the economy and another monument to the leader’s glory. Construction like the canal has been another bulwark of the Erdogan economy, but by its very nature it’s not a sustainable one and is inevitably a source of corruption as the juiciest contracts go to friends of the leader.

It’s going to be messy for ordinary Turks, who should have had the foresight to see how things are going and the sagacity to point the finger of blame in the right direction. It’s not that the opposition in power could have fixed things at no cost, but at the least the voters should have punished Erdogan, who after 15 years of increasingly autocratic rule, has no one to blame for Turkey's economic debacle but himself .



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