Concerns are growing over the health of the Turkish economy, long seen as a star performer among emerging markets, partly due to unorthodox statements by President Recep Tayyip Erdogan on economic policy that have rattled investors.
Turkey’s economic success of the past decade has been one of the pillars of the undefeated electoral success of Erdogan and his Justice and Development Party (AKP), with robust foreign investment and solid growth rates.
But economists now fear Turkey could be heading for an era of much lower sub-three per cent growth as the AKP loses its reformist zeal ahead of June legislative elections, and Erdogan concentrates powers around the presidency after moving from the job of prime minister to head of state in August.
Moreover, Erdogan has become embroiled in a sometimes farcical row with the central bank, repeatedly telling the nominally independent institution in ever more heated terms to aggressively cut interest rates despite plus seven per cent inflation.
His comments unnerved markets and Turkey’s already embattled lira this week, for the first time, fell in value to the 2.50 lira against the dollar.
“At the moment, it’s not clear whether this is posturing ahead of the election or more serious. But it does raise more general concerns about institutional independence in Turkey,” William Jackson, senior economist at the Capital Economics consultancy in London, told AFP.
‘Undermining the future’
Erdogan has in particular raised eyebrows by suggesting that high interest rates lead to high inflation, a suggestion that flies in the face of all economic orthodoxy which assumes that lowering interest rates increases inflation by raising consumer demand.
“Interest rate is a cause and inflation the result. But some of our friends think it is vice versa. What is the logic behind this?” Erdogan said before leaving on a trip to Latin America this week.
Central Bank governor Erdem Basci, who has stood defiant in the row with Erdogan, pointedly noted that high inflation is detrimental to growth and “the best contribution to growth from a central bank would be to maintain price stability.”
Deputy Prime Minister Ali Babacan, one of the few top AKP figures with the full respect of markets, meanwhile warned about making exchange rate policies the “subject of daily political polemics”.
Erdal Saglam, economics commentator for the Hurriyet daily, said that Erdogan’s approach was “undermining Turkey’s economic and political future” by risking scaring away the foreign investment that is key to its economic success.
In a sign of the tensions, the Taraf daily said Babacan had threatened to resign over the growing influence of Erdogan’s adviser Yigit Bulut but was talked out of it by colleagues.
The whole issue is coming to a head as Turkey presides over the G20 group of top economies for the first time, with Babacan this week in Istanbul chairing the first meetings of finance ministers and central bank chiefs.
Turkey under Erdogan was long seen as a poster child for economic emerging market success, but these days the country is lumped into the so-called “fragile five” emerging markets along with Brazil, India, South Africa and Indonesia, which have become overly dependent on foreign investment.
“It’s fair to say that the ‘economic miracle’ seen during the 2000s has come to an end,” said Jackson.
“Unless there’s a drastic improvement, I would be surprised to see the Turkish economy grow at rates of 3 per cent plus for a sustained period over the coming years.”
The consolation for Turkey in a tricky economic period is lower oil prices, a boon for an economy which is a major energy importer with one of the largest current account deficits among emerging markets.
The current account deficit fell 29 per cent to $45.8 billion (Dh168.2 billion) in 2014 thanks to lower oil prices, the central bank said Wednesday.
Fitch Ratings said the figures showed the economy’s “capacity for rebalancing” but warned its resilience “may be tested in 2015” by tighter US monetary policy or geopolitical risks.
Turkey still has a long way to go to meet Erdogan’s much-vaunted ambition of making it one of the world’s top 10 economies — currently it is number 18 according to the World Bank — when the 100th anniversary of the modern republic is celebrated in 2023.
A report on global growth published by the OECD this week said that Turkey’s income gap with the upper half of OECD countries “continues to narrow but remains large”.
It called for reform to encourage formal employment in particular among the older generation and women — many Turks are employed illegally due to excessive regulation — as well as improvements to the inconsistent education system.
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