Opinion

Erdogan insists Turkish economy is fine

March 21, 2018

NO leader likes to be told his economic policies are wrong, if not indeed downright dangerous and Turkey’s President Recep Tayyip Erdogan is more sensitive than most.

In the wake of International Monetary Fund warnings and a rating cut by Moody’s into bigger junk status, Ankara came out fighting, accusing the IMF of peddling failed economic theories, the ratings agencies of “loan-shark logic” and labeling economists who criticized its economic direction as “dinosaurs”.

The IMF has been wrong before and all the credit ratings agencies, including Moody’s, were once busy signing off extremely dubious subprime loans as rock solid premium grade. The rest is bitter international economic history.

Nevertheless, there do seem grounds for concern about Turkey. In the wake of the 2016 failed coup, the Turkish economy nose-dived. But Erdogan’s administration immediately introduced a package of measures designed to stimulate growth. It offered government-backed loans, tax breaks and incentives for employment. The impact was remarkable. The economy grew over eleven percent in the last quarter of 2017 returning an overall growth for the year of some seven percent. Much of this was underpinned by a recovery in Europe which, with the Middle East, is a major market for the Turkish white goods and automotive industries and the construction sector.

But what has been worrying economists, including respected figures in Turkey, is that this has been achieved on the back of a splurge of borrowing from abroad. And the nature of that borrowing is particularly concerning. Both the government and the corporate sector have been forced to seek short-term loans. Given the country’s low financial rating, these are expensive and must be “rolled” — renewed — when they run out. Each renewal attracts a fee which tends to become higher as more and more debt has to be renegotiated, often at a greater interest rate. As Greece discovered to its appalling cost, in the end, borrowing becomes focused almost exclusively on the need to repay past loans and the high rates of interest that came with them.

The Turkish current account deficit had risen to $7.1 billion this January, equivalent to 6.1 percent of Gross Domestic Product, a relatively high figure which Ankara however insists is not dangerous. The government also says that the current 12 percent inflation is no problem. The difficulties will come as the last effects of quantitative easing in North America and Europe fade away, allowing interest rates to climb to what economists call normal levels. At that point Turkey will find itself paying significantly more for its international short-term borrowing while the more stable and generally lower-cost long-term loans will be even further out of reach.

But Erdogan doubtless feels he has seen off bigger challenges than this. He blames international financial pessimism on the manipulations of his exiled opponent Fethullah Gulen, once his close political ally. The success of the Turkish army in overrunning much of Syria’s Afrin policy doubtless buoys up his administration, even though the cost of this military involvement must be imposing further strain on the treasury in Ankara.

It is being assumed that Erdogan is looking to reinforce his AK party’s position in municipal elections next March and seeking to show strongly in presidential and parliamentary elections in November 2019. He thus has another 18 months to ensure the wheels do not come off his speeding economy.


March 21, 2018
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