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Turkey in a week – 1: 4 June 2018

It happens very rarely in Turkey that everyone agrees on one thing, but it happened, everyone agrees that the second half of May, 2018 will be remembered in the future as a turning point for Turkey’s expected economic crisis. High inflation, high current account deficit, high private debt and increasing budget deficit have been the obvious indicators that Turkish economy hasn’t been doing very well even if AKP government argues otherwise based on questionable growth data. Turkey needs foreign capital inflows to keep coming steadily due to its high Gross External Debt Stock (53.3% of GDP in 2017, with as high as 70% of that is private) and high current account deficit (5.5% of GDP in 2017). Turkish Lira has depreciated 50.1% since January, 2016 and inflation has been on rise mainly because of import prices (12.15% in May 2018, the second highest among emerging markets after Argentine). Along with its structural economic problems, Erdoğan’s insistence on low interest rates has not been very helpful to Turkish Lira as foreign capital increasingly ask higher risk premium to invest in Turkish assets. Hence, with fears that the economy may not survive until 2019, Erdoğan and AKP government had to announce snap presidential and parliamentary elections in April for 24th of June. Even though the first reaction to the snap election decision from the markets was positive with expectations that the Central Bank would increase interest rates in order to keep exchange rates low on the eve of the elections, the Lira started to appreciate and İstanbul Stock Market was on rise, it quickly became reversed when the Central Bank did not increase its interest rates. And finally the pressure on the Lira peaked in the second half of May with the rise in interest rates in the USA and Erdoğan’s “surprising” remarks about interest rates in London when he went to convince foreign investors not to abstain from Turkish economy.

Erdoğan’s original ideas on the relationship between interest rates and inflation are not new and they are far from unreasonable for his sake. He has been enjoying debt-driven growth since he came to power thanks to low interest rates stemmed from abundant international capital preferring developing countries like Turkey, until FED decides to turn to contractionary monetary policy. The economy’s dependence on ever growing construction sector demands low interest rates as well. Erdoğan seems keen to keep interest rates low so that he can have old good days of cheap, unhealthy growth without any political cost even when he applied austerity policies at the beginning of his office. His remarks in London on May 14th that high interest rates are the reason for high inflation and he will be closely watching monetary policies after the elections created a free fall for Turkish Lira seeing the deepest level of 4.92 against US Dollar. The Central Bank resisted to increase interest rates to stop the chaos but gave up on 24th of May by raising its late liquidity window rate by 300 basis points to 16.5%. The lira reversed losses after earlier plunging as much as 5.2 percent to a record low, however, it is still 17% weaker than at the start of the year implying a serious rise in the foreign debt stock of private sector. More importantly Deputy Prime Minister Mehmet Şimşek and Turkish Central Bank Governor Murat Çetinkaya had to visit London again last week to assure foreign investors and it seemed to have worked for now in postponing the problems deteriorating day by day after the elections. Reports suggest that Şimşek and Çetinkaya said that Erdoğan’s comments were targeting mainly domestic audience to gain votes for the elections and AKP government and Erdoğan will follow the global principles on monetary policy and respect the markets.

Developments in the second half of May showed that the economy will be the primary concern and decisive subject not only for the elections but also for the future political picture of Turkey after the elections. Economic experts anticipate that IMF’s door will have to be knocked after the elections, but the main question is now that who will be holding the power to do that. As IMF will very very likely demand austerity policies in return for its help, no presidential candidates are openly discussing the matter with this implication. Erdoğan has been avoiding talking about economy except mentioning “success stories” of 16 years long AKP era and promising to solve the current economic problems after the elections during election speeches. Opposition candidates have a lot in their plates to criticize Erdoğan and AKP era, and even if the economy has been one of the main headlines, they are far from open in their speeches what voters should expect after the elections in terms of economic policies. Opposition presidential candidates blame AKP for following wrong economic policies and promise redistributive means to amend inequalities and poverty. CHP’s candidate Muharrem İnce was the only one who told in a TV program that he will begin austerity policies first by cutting the Palace’s expenditures. He said “The state will be the one that tightens its belt not the people”. However, he has not suggested yet how he is going to do that.

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