Unorthodox economic policies put forward by the Turkish veteran have created a worrying Turkish economic landscape. With early presidential and parliamentary elections less than a week away, an Erdogan victory could cause a continued worsening of the Turkish economic environment and raise concerns over a global credit crisis.
What Is Erdoganomics?
As stated in an interview with Bloomberg earlier last month, Erdogan harboured a deep antagonism towards conventional economics and held the view that high interest rates lead to inflation. “The lower the interest rate is, the lower the inflation will be. The moment we take it down to a low level, what will happen to the cost of inputs? That will go down… You will be able to get the opportunity to sell your products at much lower prices… The matter is as simple as that.”
The president’s failure to understand basic economic concepts has left a Turkish economy with soaring double-digit inflation, a currency crisis and one of the widest current account deficits in the world.
How Did We Get Here?
Last April, Erdogan achieved a narrow victory in a historic referendum that transformed the country’s parliamentary democracy into a presidential system that granted him sweeping new powers. Only a year after a failed coup attempt, Erdogan’s amendments included the abolition of military courts as well as strapping the ability of the parliament to initiate a motion of no confidence. Not only were the elements of parliamentary procedures altered, but Erdogan also extended his judicial presence, by gaining the ability to appoint four out of 13 judges to the highest judicial board in the country. Such means of ceasing power and control would not pass the acid test of democracy if it were used in Europe.
What Can We Expect?
In a nutshell: Large influence over a legally independent Central Bank.
Political intricacies aside, Erdogan has lead Turkey into a highly uncertain macroeconomic environment. In the midst of a currency crisis, by pressing the central bank not to raise interest rates, prices have continued to accelerate, leading to an inflation rate of 10.9% and highly reduced credibility for the central bank. To make matters worse, Erdogan hinted last week that if he won this week’s vote, he would potentially further curtail the central bank’s independence, which would possibly lead to an even higher rate of inflation.
The currency crisis has fueled an unstable business environment. Over the last four months, the lira has lost approximately 15% of its value and plunged to a record low against the dollar. Turkey is highly dependent on cheap foreign credit due to its reliance on imports.
With a strong reliance on credit and weak relationships with neighbouring countries, an Erdogan win would see a rise in the cost of debt for an economy which simply can’t sustain it. Each cent of depreciation for the Turkish lira adds 5bn lira to the cost of borrowing to a Turkish economy that already boasts one of the widest current account deficits in the world (approx. 6.5% of its GDP).
Deteriorating Balance Sheets and Sovereign Ratings
Turkey’s state of emergency has been further dented by seasonally high debt repayments in the recent months. At present, the country only holds $87bn reserves vs $126bn in short-term debt and has suffered significant reputational damage.
External rating agencies have cut their sovereign debt rating on Turkey, pushing it further into junk-territory to BB-, and have downgraded several Turkish banks (T.C. Ziraat Bankası AŞ, Akbank TAŞYapı ve, Kredi Bankası AŞ).
The financial markets have reacted swiftly to Turkish imbalances with the Borsa Istanbul 100 Index dropping over 18% so far this year and Turkey’s CDS price at its highest level in six years.
On the Verge of a Credit Crisis
Erdogan’s intractable stance towards monetary policy has yielded an overheated economy with a worrying current account deficit and a weak lira. Far from negotiating with the IMF, Turkey needs an independent monetary policy and a cease to Erdoganomics. Otherwise, Turkey’s diminished access to international markets and large pending fines from US investigators stand to leave the country at the brisk of a debt crisis.
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