The Turkish economy has come a long way in the last decade, propelling Ankara’s ascent to greater global prominence. Prime minister and presidential candidate Recep Tayyip Erdogan is credited with overseeing a transformation of the country’s economy into a fast-growing emerging market.
But the economy has shown signs of weakness over the past year amid domestic troubles sparked by a wide-ranging corruption scandal in December and mass street protests. Like many other developing countries, Turkey has found itself facing skittish markets, volatile exchange rates, and an uncertain outlook.
“According to the experts, the soft underbelly of the Turkish economy is the current account deficit. Individual’s total credit debt is 343 billion Turkish Liras, or more than 120 billion euros, and according to official numbers nearly 645,000 people paid off no credit debt in the first half of the year,” says euronews’ Bora Bayraktar.
“Things are not going well, I think we are not going in the right direction,” said one market trader. Does he struggle with debts? “Yes I do. Yes, just like every other tradesman, I have debts. Any other way is impossible. How many tradesman are there around who can work with his or her own capital? Either to the bank or to the tax office or to the insurance office, everybody has debts”.
Turkey’s economy grew a surprising 4.3% in the first quarter of the year, beating IMF and World Bank forecasts, and largely outpacing European Union countries.
Yet for all its strengths, Turkey remains vulnerable. Its first major problem is its dependence on foreign funds. This structural imbalance has been obscured by the waves of money that have been crashing in because of loose monetary policies elsewhere.
“America’s Central Bank is discussing increasing interest rates. This is important because we will see interest rates rising in the next eighteen months. It will increase interest rates in Turkey. Less funds will come to Turkey and previous investments will leave Turkey. In this political environment politicians look for higher growth. But there are no funds for it,” says Uğur Gürses of the Economist Radikal newspaper.
Turkish officials argue that concerns about the country’s prospects are exaggerated. In an attempt to maintain the high growth and prosperity that is the main source of the AKP’s popularity, the government is pushing for more interest rate cuts, saying they will help to slow inflation, which accelerated to 9.3% in July.
This strategy puts Erdogan at odds with the Central Bank governor Erdem Basci, fueling rumors that he could resign before his five-year tenure expires in 2016.
“If Erdogan becomes the president, he indicates he will make radical changes in economic policies. What kind of radical changes? He implies that the framework of the economy will develop on production, industry and exports. He says the interest rates must go down accordingly. In this case we can say that the unemployment rate will go down, as it will not send the inflation rate higher, and Turkey will be closer to full employment,” says Türk Hava Kurumu Üniversitesi’s Dr. Cemil Ertem.
Erdogan has set an ambitious target to make Turkey one of the world’s top ten economies by 2023. But the institutions that played a role in Turkey’s success over the past decade, such as the Central Bank, now struggle to appear independent of the prime minister’s will.
“There is a need for stable capital investment like in China. But it is near to zero. As long as there is no political stability or no rule of law, these investments will not come. This is a negative factor. We must understand that one-party government is not political stability. It is separation of powers, the rule of law. It will take time. But this will be reflected in our economy as hard numbers,” says Uğur Gürses again.
Erdogan has often proved his critics wrong. But whoever leads Turkey next will face strong headwinds before building on the political and economic advances the country has made since 2002.
On interest rates and inflation http://www.businessweek.com/news/2014-08-05/turkey-economy-chief-says-lower-rates-needed-to-slow-inflation
Turkey’s inflation in July: http://www.tradingeconomics.com/turkey/inflation-cpi