Will Erdogan’s star crash to earth under Turkey’s debts?
IN DEPTH
Will Erdogan’s star crash to earth under Turkey’s debts?
The Turkish president has built his reputation on economic success — but the country is staggering under enormous debt, writes Hannah Lucinda Smith
Among the tulip-motif tiles, the Ataturk trinkets and the ceramic ornaments of whirling dervishes, there is another classic Turkish souvenir on sale on every Istanbul street corner. Street hawkers line up bundles of one million, five million and ten million lira notes on wooden carts, weighing them down with stones to stop them fluttering away.
For Turks, many of whom still think in the millions when it comes to money, these banknotes stir recent memories of bad times. In July 2001 the lira went into freefall, losing 13 per cent of its value against the dollar overnight. Inflation ran at 1,800 per cent. Nothing the central bank did, from auctioning bonds to raising interest rates to 105 per cent, could stop the rot.
The crisis eventually led to the collapse of the government and ushered in the era of President Erdogan’s AKP, which was elected in November 2002 on the promise of sorting out the economy.
Unlike its Islamist predecessors, this freshly minted party took a pro-business, liberal tack. It focused on expanding foreign direct investment, while the central bank was given the freedom to use interest rates to keep inflation under control. In 2005 the currency was revalued, with one million lira becoming one — and old banknotes were relegated from legal tender to curios.
Mr Erdogan has built much of his popularity on his party’s economic successes. Over the 16 years that the AKP has been in power GDP has more than trebled. At street level, the country is almost unrecognisable — the outlying suburbs of its cities have been transformed from shanty towns into modern districts and Turks who once had to endure hours-long bus journeys from city to city can now take low-cost flights between a network of gleaming local airports.
Even in the five and a half years that I have lived here, Istanbul — the megalopolis where almost a quarter of Turkey’s 81 million population lives — has undergone a metamorphosis. Two tunnels have been dug under the Bosphorus strait, one for the metro and another for cars. A third bridge has been built over it, and the world’s biggest airport will open on the northwestern fringe in October.
A manmade canal running parallel to the Bosphorus will provide a new route for shipping traffic between the Black Sea and the Sea of Marmara without the deadly twists and narrow turns of the natural strait. Everywhere, cranes swing between new high-rise housing developments. The AKP’s mortgage liberalisations mean that Turks who would once have been forced to live with their families until they could buy their own houses outright can now be part of the property-owning middle-class dream.
Growth figures look impressive. Turkey’s GDP increased by 7.3 per cent last year. But they mask some deep structural problems. The economy is still based on low-tech industries such as textile production and agriculture, and much of the consumer boom of the past decade is down to the cheap credit that has flooded emerging markets since the financial crisis of 2007.
Turkey’s huge infrastructure projects are funded through deals similar to the private finance initiatives (PFI) that Tony Blair’s Labour government used to build hospitals, schools and waste disposal plants in the UK.
Private companies provide the capital up front and the Turkish state pays them back over decades at a high rate of compound interest. The gratification is instant – Mr Erdogan and his supporters never miss a chance to boast about the thousands of kilometres of road and railway links they have built – but the debt is huge and mounting. And the majority of it is in US dollars.
That is now coming back to bite in Ankara. The dollar’s recent buoyancy has hit all the emerging market currencies but Turkey has been battered the worst. The lira has lost 20 per cent of its value against the US currency since the start of this year. Last Wednesday it looked set to tip over into a full-blown collapse, losing 5 per cent in a matter of hours. It was saved, to an extent, by an eleventh-hour emergency interest rate hike. The lira has now strengthened back to what it was a week ago but experts warn that it could decline again.
Turkey’s cauterised media is reporting the cause of the crisis as a plot of the “interest rate lobby” — or, as the state news agency Anadolu put it more baldly this morning, of a “Jewish lobby”. Such antisemitism plays well among Mr Erdogan’s conservative base, already riled with his spitting rhetoric against Israel in recent weeks.
In reality, this crisis is almost entirely down to the vanities and economic ignorance of the president himself. Over his 15 years in power Mr Erdogan has transformed from a leader who surrounded himself with experts to an autocrat who has purged his inner circle of rivals and naysayers and filled it with sycophants.
All of his co-founders in the AKP — largely pro-Western, pro-market thinkers — have deserted him. He has filled their void with his own unorthodox economic ideas, repeatedly overruling the central bank as it tried to raise interest rates. As a result, inflation has now risen to 11 per cent, according to official figures, and to nearly 40 per cent, according to purchasing power parity.
Too scared, or too blinded by fealty, none of Mr Erdogan’s advisors thought to step in to stop his disastrous meeting with investors in London this month, in which he said that he would be taking full control of monetary policy after next month’s elections.
There was “shock and disbelief in the room”, according to witnesses who spoke to Reuters, and the lira’s plummet was instantaneous.
Mehmet Simsek, the deputy prime minister and former Wall Street banker who is perhaps the only credible economic figure left in the Turkish government, was dispatched to London yesterday for a second investor meeting to try to heal the wounds. It has had some success. But the longterm figures reveal the extent of the crisis brought about by Mr Erdogan’s autocracy and mismanagement; the lira has halved in value against the dollar since he became president in August 2014.
With elections in just short of four weeks, any fresh drop in the lira could spell disaster for Mr Erdogan. He has told Turks to change any savings they hold in euros or dollars to the lira. Those inclined to listen to him are also those who will be hardest hit should the economy collapse.
Meanwhile, there seems little chance that the president will call in economic heavyweights to work out a rescue plan as the AKP’s predecessors did in 2001, in the shape of World Bank technocrat Kemal Dervis. Mr Erdogan has glossed over that part of Turkey’s economic recovery in the early years of his reign. He has proved himself adept at such historical revisionism. But as the past week’s rollercoaster has shown, markets are less easy to fool.
Comments