Turkey’s economy crashed in 2001 in a major crisis that saw stocks plummet, interest rates rise to 3,000 percent and tens of thousands of people left unemployed. The circumstances leading to that crisis bear worrying similarities to trends visible in the country’s economy today.
The dual risks embodied by the current account deficit and foreign trade deficit continue to rise in tandem, and, accompanied by a significant budget shortfall, these have triggered a phase of out-of-control Turkish lira devaluation and rising interest rates that threatens significant harm to Turkey’s economy.
Economy Minister Nihat Zeybekçi’s claim that the reality in Turkey is not reflected by the dollar’s rise against the lira echoes similar statements by the minister who presided over the 2001 crisis, Recep Önal, who called the rising exchange rate “speculative” and said it would soon right itself.
After the economy went on to spectacularly crash that year, the programme for economic renewal laid out by Önal’s replacement, Kemal Derviş, was designed to bring Turkey’s stricken economy in line with International Monetary Fund (IMF) guidelines. Ali Babacan, economy minister for the now ruling Justice and Development Party (AKP), would continue to follow this programme to the letter until 2008.
By the election period of 2015, the economy had taken a course that would provoke Babacan into criticising Turkey’s focus on rampant, poorly regulated construction and rent-seeking practices, which was being followed at the expense of transforming industry and manufacturing. He has not served as a cabinet minister since making those remarks.
The Turkish economy has for a long time been beset by a series of crises, recurring around once a decade and stemming from current account and foreign trade deficits. When a rapid fall in the lira’s value appeared as the first sign of such a crisis early in 2017, the government took precautionary measures to stem the tide.
The injection of public funds into the economy, billions of lira worth of credit provided by the Treasury with support from Turkey’s Credit Guarantee Fund (CGF), and a series of VAT and tax exemptions helped shore up the lira’s value.
Hüseyin Aydın, the general manager of Turkey’s largest state-owned bank, Ziraat Bankası, described how they had “given everything they had to hand” to provide the CGF-guaranteed credit, which came to a final of 207 billion Turkish lira ($50 billion).
Now, without anything left to pour into the ailing economy, this credit is gazing into the jaws of death. Interest and exchange rates have not held. According to a survey by Turkey’s central bank, banks are inclined to tighten lending standards in the second quarter. Businesses suspect the same, and foresee difficulties finding sources of credit.
Surveys by the Turkish Statistical Institute (TÜİK) and central bank show a decline in confidence indexes both for businesses and consumers. Projections and expectations for the next 3-12 months are dark and pessimistic.
This disaffection can be explained by the multiple government bodies, most prominently the presidency and parliament, vying for control of the economy. Added to this, there has been a marked lack of much-needed structural reforms, institutions which require autonomy appear to be under political tutelage, and the president and his advisers have been taking major economic decisions that bypass the prime minister and his government.
With the central bank only nominally independent, its institutional reputation has hit rock bottom domestically and internationally. Trust in the bank to carry out its primary duty – stabilising prices, currency and interest rates – has utterly evaporated, not least due to the incredible aberrations in its inflation forecasts.
When Mehmet Şimşek, deputy prime minister in charge of Turkey’s economy, warned of the country’s precarious economic situation, Turkish President Recep Tayyip Erdoğan’s indignant response served as a warning signal of the straining fault lines developing between the presidential palace and parliament.
These looked set to transform into a full blown earthquake after reports surfaced that Şimşek had resigned. Later statements by Prime Minister Binali Yıldırım and Şimşek however confirmed that he would return to duty, stabilising the situation.
Yet the deep rift could no longer be concealed after Finance Minister Naci Ağbal opposed an omnibus bill described as “revolutionising” Turkey’s VAT system.
The bill made a change to 33-year-old VAT regulations in order to quicken the repayment of tax rebates to companies to five years. The value of these rebates amounts to 140 billion Turkish lira.
The prime minister and finance minister were bypassed as the law was put together. Rumours in Ankara abounded that the orders came from the presidency and Erdoğan’s advisers. If the new regulations had passed, the first instalment of rebates to be paid in 2019 would be worth 10 billion lira.
Rather than just the 30-40,000 companies that were slated to receive rebates, it seems that the presidency planned to boost the figure to 10 billion lira in order to deliver perks to a much broader segment of the population in time for the three crucial elections due by November 2019.
The reductions in tax on fuel, prices of which have been rising almost on a weekly basis, was similarly designed to curry favour with voters ahead of the elections.
The contradiction that holds apart the presidency and the government on the issue of Turkey’s economy has also become visible in the country’s key economic institutions.
The Turkey Wealth Fund (TVF), a sovereign wealth fund with a portfolio worth about $40 billion, founded in August 2016 and attached to the prime ministry, has been run “by proxy” since Erdoğan announced a change in its management on Sep. 8, 2017.
Former TVF chairman Mehmet Bostan was replaced on that date by Himmet Karadağ, the director of the Istanbul Stock Exchange. Yıldırım appeared on a slew of mainstream news channels around that time to declare that a new chair for the TVF would be chosen. After eight months, one is yet to materialise.
On his return from a trip to Azerbaijan in March this year, the prime minister complained that the performance of the team leading the TVF had not met expectations, and that plans were afoot to replace it in the near future with a “well respected team with knowledge of the global markets”. After a month, still no movement on that front.
Meanwhile, the president has been exerting his influence on the fund, which counts his chief economic adviser Yiğit Bulut among its board members, transferring 3 billion lira from Turkey’s Defence Industry Fund to the TVF ahead of the April 2017 constitutional referendum.
Ziraat Bank, another state asset transferred to the TVF, provided the $700 million loan to Erdoğan Demirören, a pro-government businessman, to buy out Doğan Media, Turkey’s last mainstream media company without links to the government. The 10-year loan to Demirören accounted for one half of a $1.4 billion, one-year loan Ziraat Bank has just taken out from 40 international banks.
The Capital Markets Board of Turkey (SPK), another key financial regulatory institution, has been without an executive board for two months. The board’s previous chairman, Vahdettin Ertaş, completed his tenure in February; economic circles speculate that the presidency and parliament are still wrangling over who will take his place.
TÜİK, another important institution for Turkey’s economy, has also been administrated by proxy since February 2016.
Quite apart from the chasm that the economy has opened between the presidency and parliament, even Erdoğan’s own advisers cannot see eye to eye on certain issues.
Bülent Gedikli, one of the few among these with a background in the Treasury, received harsh criticism when he dared to contradict Erdoğan’s own line by calling for the central bank’s intervention to meet the risks posed to Turkey’s exports, manufacturing and employment by a weakened lira.
The AKP are set to hold their annual congress in June this year, after which many expect President Erdoğan to radically overhaul the cabinet, and particularly those ministers responsible for the economy.
Most likely, neither Şimşek nor Ağbal will have a place in the coming cabinet, as Erdoğan looks to gear the economy towards the coming election. As such, we can expect that their replacements are figures who will take their orders from the presidency, granting it unfettered access to funds in the budget and public banks.