Turkey’s financial crisis: Erdogan needs to make new friends
12 Sep 2018|

One of the drawbacks of amassing untrammelled power, Turkish President Recep Tayyip Erdogan might ruefully reflect, is that he’s saddled with every decision and blamed for every crisis. After finally ascending to one-man rule in elections at the end of June, it was a matter of weeks before Erdogan was hurled into a currency crisis—which threatens to turn into a full-blown financial crisis that may weaken his iron grip on the country.

But Erdogan doesn’t usually do reflection. His primary tactic is to polarise, loudly, in barnstorming tours of Turkey and in daily tirades on television channels that hang on his every outburst. These are methods that have served him well. With June’s dual general and presidential elections, he has clocked up 14 victories in more than 15 years in power, first as prime minister and then as president.

But running an economy isn’t the same thing as running for office. And for Erdogan, economics has only ever been an accoutrement—to be artfully draped around the election calendar. His ruling Justice and Development Party (AKP) came to power in 2002 just as Turkey emerged from its worst financial crisis since 1945. He hasn’t really had to make hard economic choices. He does now.

Turkey is facing an economic emergency, the essentials of which were already in place before Erdogan fell out spectacularly last month with US President Donald Trump, hitherto such an admirer of the Turkish strongman that he fist-bumped him at July’s NATO summit.

Turkey’s economy faces many of the problems afflicting emerging markets, from Argentina to South Africa, especially as the cost of foreign borrowing, kept artificially low as the world recovered from the 2008 financial crisis, has been rising. But Erdogan’s construction-and-consumption economic model, tailored to almost yearly votes, relied for much longer on cheap foreign credit that has kept the economy vulnerably overheated.

Turkey is suffering from high inflation (currently running at 18%); a plummeting currency (down 25% last month alone, and more than 40% for the year) that means leading businesses and banks that owe US$295 billion in foreign loans, half of which mature in the 12 months to next July, risk defaulting; and a gaping current-account deficit, running at an annualised 7% of GDP, that raises the spectre of a balance-of-payments crisis.

Trump is now adding to Turkey’s pain. The cauldron of grievances between Ankara and Washington was already overflowing. Turkey is livid at America’s backing, in the air and on the ground, of Syrian Kurd fighters linked to the Kurdistan Workers’ Party (PKK) insurgency inside Turkey, and its refusal to extradite Fethullah Gülen, the Pennsylvania-based imam and former Erdogan ally whose shadowy network Ankara blames for the abortive coup in 2016.

The US, long before Trump, was fed up with its NATO ally Turkey’s dalliance with Russia and its breaking of sanctions against Iran. Congress is readying sanctions to dissuade Ankara from buying the S-400 air defence system from Moscow, including withholding the new generation of F-35 fighter jets, of which Turkey has ordered more than 100. The sanctions-busting issue has so far seen a government-linked bank executive, Mehmet Atilla, sentenced to 32 months in prison by a New York court, with what promises to be a huge fine on state-owned Halkbank still to come.

The final straw for the US is the continuing detention of Andrew Brunson, an evangelical Protestant pastor Ankara is holding on fanciful allegations of collusion with Gülenist coup plotters and the PKK (even though Gülen first fell out with Erdogan over the then prime minister’s peace feelers to the Kurds). Erdogan also maintains that the Halkbank/Atilla case in the US is a fabrication by the Gülenists.

He would be on stronger ground emphasising that Trump—and his evangelical vice-president, Mike Pence—are particularly exercised by the Brunson case ahead of November’s mid-term elections, given that Trump won more than 80% of the white evangelical vote in 2016.

At any rate, Trump’s intervention accelerated the freefall of the lira, and enabled Erdogan to sell the currency crisis as a foreign plot. After years of denouncing the ‘interest rate lobby’, the AKP chorus—which now amounts to almost all the Turkish media after the right-wing coup at the independent Cumhuriyet newspaper last week—is now vilifying the ‘currency conspiracy’.

This is a successful tactic, at least in the short term. Trump’s decision to sanction Turkish ministers close to Erdogan and to double tariffs on US imports of Turkish steel and aluminium lends credence to the government’s charges that it is the victim of an ‘economic war’. The US president’s belligerence has all but obliged Turkey’s opposition to line up behind its own president. But there are difficulties with this approach in the longer term.

The crisis is largely home-grown and needs to be fixed internally. Yet pulling the obvious levers would mean a loss of face for Erdogan. A salutary rise in interest rates—which Erdogan has called ‘the mother and father of all evil’—might brake the lira’s slide. Erdogan affects to believe that high interest rates cause inflation. More germane is that they would endanger his credit-fuelled growth-at-any-cost strategy ahead of municipal elections next March in which he fears the loss of Turkey’s big cities.

Erdogan, moreover, ruling in solitary splendour from his neo-Ottoman kitsch palace in Ankara, has cut himself off from every reservoir of expertise and knowledge. Liberals and left-wingers who backed him to neuter the army and steer the country towards Europe have long since abandoned him. He has cast all his AKP co-founders into political limbo. The vast purges against Gülenists infiltrated in the state amount to a lobotomy of the cadres the government hitherto relied on. And now that Erdogan has centralised all power—including substituting the top echelons of the civil service with political appointees—he has traded institutional wisdom for courtiers and sycophants. Instead of Mehmet Simsek, his former economy chief who had credibility in the markets, Berat Albayrak, his untested son-in-law, is now economy tsar.

A paradox facing the president is that his very success in selling the crisis as a foreign plot translates into votes for his ultra-nationalist allies rather than the AKP—and makes it all but impossible for him to approach the International Monetary Fund for help.

He talks instead of how his ‘new friends and allies’ will help Turkey, as part of a global anti-Trump alliance. But Russia’s priority is to climb free of Ukraine-related sanctions. China wants to end Trump’s trade war, and in any case mostly does project finance rather than debt relief. The EU, reliant on Turkey to curb Syrian refugee flows, can help a bit—but is constrained by Erdogan’s autocratic behaviour. Qatar, Turkey’s one surviving Arab ally, has its hands full with a Saudi-led blockade, yet has pledged US$15 billion. But that’s a fraction of the sums Turkey will eventually need.

To relieve pressure on the lira and perhaps unlock an eventual deal with the IMF—the only body that can mobilise such sums—Erdogan will have to find a face-saving way to release Brunson and damp down Trumpian ire. He has the entire media at his disposal to spin this volte-face.