Turkey’s embattled prime minister, Recep Tayyip Erdoğan, can be a good orator and skilled politician; but his government’s excellent record of preserving political stability and economic growth for a decade is what has made him a popular hero.
Even his staunchest critics acknowledge that he deserves credit for catapulting Turkey from a backward nation into one of the regional powerhouses. With its political stability, foreign investors flocked into Turkey while small Turkish entrepreneurs made significant strides in exporting their goods and services - particularly to Arab nations - in the past few years.
With the Great Arab Turmoil making things much worse for Turkish businessmen in Egypt, Syria, Iraq and Libya, and economic recovery shifting from emerging markets to advanced economies, the Turkish leader’s most important accomplishment also seems to be rapidly slipping away from his hands. He frequently charges his opponents of trying to stop Turkey’s economic engine and boasts of being a leader who takes his nation forward in economic growth.
With three elections ahead, Erdoğan doesn’t want to be seen as a leader who struggles only to keep the economy on its feetMahir Zeynalov
He indeed did. When much of the world was struggling with a severe economic meltdown, the Turkish economy posted unprecedented growth and exports broke tandem records. Despite its ballooning current account deficit, Erdoğan’s government continued to aggressively invest across the country, creating jobs and improving the overall welfare of the country. He believes that only economic growth could solve Turkey’s financial woes, brushing aside concerns that that ambition for high growth could also be a gun turned at the country’s head.
Turkish ministers responsible for the economy were expecting that the U.S. Federal Reserve would make deeper cuts in its monetary stimulus and knew that the Turkish economy would not remain unaffected. To come out of the situation with the least amount of damage, Turkey endorsed an economic policy of what they called a “soft landing.”
Erdoğan, however, didn’t like the idea because it included an interest rate hike, less borrowing for investment and lower growth rates.
He also seems convinced that raising interest rates would be surrendering to what he claims an “interest lobby” – clandestine local and global business circles who are benefitting from high interest and low growth rates. While he continues to crack down on his critics and subdue the judiciary amid a recent graft scandal, the Turkish lira plunged to record lows on Friday despite direct central bank intervention by burning nearly $3 billion in foreign reserves.
The lira weakened against the dollar beyond 2.33 for the first time, meaning that local currency lost 29 percent of its value against the dollar and 35 percent against the euro in the past nine months. For a nation that is heavily dependent on imports, further decline in the lira could significantly increase its current account deficit and raise inflation to levels that have been unseen since 2003.
Foreign investment dilemma
With three elections ahead, Erdoğan doesn’t want to be seen as a leader who struggles only to keep the economy on its feet. His primary plan is to lure back foreign investors and decrease imports by imposing high taxes. But his recent anti-democratic policies could only shun foreign investors from the country, whose leadership slaps companies with arbitrary tax fines, trying to sink a bank it doesn’t like and constantly tries to foment political turmoil in the country.
Several days ago, the head of the business group TÜSİAD said that foreign investment will not be made in a country in which there is no respect for the rule of law, where legal codes conflict with European Union rules, public procurement laws have been amended dozens of times and companies are pressured through tax fines. Erdoğan went ballistic against the remarks a day later, describing the statement as “treason” to the nation.
Not a good idea
Erdoğan also often criticizes another business group, TUSKON, which is believed to be close to influential Turkish cleric Fethullah Gülen, who is at odds with the prime minister. Targeting these two groups, the main driving engines behind Turkey’s more than $150 billion in exports, does not seem to be a good idea for a premier who bets his country’s economic growth on foreign investments.
The fate of his multi-billion grandiose projects - a third bridge, the world’s largest airport and a canal in Istanbul - seems to be in danger if the nation’s foreign debt grows in this pace.
Erdoğan came to power following a turbulent decade, when a number of coalition governments failed to assure investors and defend the Turkish lira. For Turks, a depreciating currency is reminiscent of those dark days when, in the words of Erdoğan, “even street vendors purchased dollars at the end of the working day.”
It is now becoming clear that Erdoğan’s ambition to maintain growth could pose serious risks and challenges for the economy that needs a soft landing and strong local currency. Running on a snow-covered road is not always helpful.
Mahir Zeynalov is an Istanbul-based journalist with English-language daily Today's Zaman. He is also the managing editor of the Caucasus International magazine. You can follow him on Twitter @MahirZeynalov