BEYOND THE BOSPHORUS: Can Turkey really afford its pre-election spend-fest?

BEYOND THE BOSPHORUS: Can Turkey really afford its pre-election spend-fest?
An election street scene in Kilis in south-central Turkey.
By Suna Erdem in London May 25, 2018

It looks like a good time to be a pensioner in Turkey right now. The country’s retirees are gearing up for the first of two 1,000-lira ($200) bonus payments promised by the government. The second is scheduled to arrive after the snap presidential and parliamentary elections on June 24, perhaps as a reward for being good voters and once again choosing President Recep Tayyip Erdogan for Turkey’s top job and his Justice and Development Party (AKP) for government.

Not enough? Then why not try the offering from the opposition Republican People’s Party (CHP). Instead of calling out the payments as blatant bribes in a country whose economy is teetering, the CHP believes that the pensioners deserve at least 60% more. Meral Aksener, presidential candidate for the new Iyi (Good) Party, is, meanwhile, promising comprehensive debt relief that includes complete write-offs for pensioners, among others, while jailed Kurdish candidate Selahattin Demirtas is offering 3,000-lira ($600) pensions.

Turkish elections are always characterised by outlandish promises and voter bribery, but the unprecedented sums being bandied about this time highlight just how high the stakes are, for everyone.

Whoever wins the presidency will take over a role beefed up beyond recognition—Turks last year in a referendum voted by a narrow (and disputed) majority last year to abolish the role of prime minister and adopt a presidential system instead. And although parliament will be diminished, Erdogan’s powers will only be complete if AKP also wins a majority there—any failure there could lead to a cantankerous cohabitation and deal a blow to Erdogan’s unstoppable career. For opponents, this could be the last chance to sabotage Erdogan’s project to cement one-man rule with a ‘coronation’.

Hence AKP’s recent multi-billion dollar incentive package that seems to encompass almost the entire population, plus plans for extra social welfare payments, which will cost billions of liras. An amnesty for students dismissed from university as well as a late fees write-off, plans to hire extra health workers and a cut in housing loan rates are among measures revealed by various government ministers.

And, in its desperation, AKP has also announced a wealth amnesty for undeclared money kept in tax havens or secret accounts—effectively an invitation to bring in illegally obtained and/or tax evading money from abroad without fear of tax or auditing. Even this is not a panacea, however. Erdogan has done this before and each time the returns have diminished.

Volte-face on early polls
Turkey’s economy, which last year produced a stellar 7.4% growth rate, outstripping China’s expansion, has somehow been riding beyond predictions and expectations. But Erdogan, already under pressure from his right-wing election partners who wanted to get to the ballot box before they seeped any more support to former rebel nationalist Aksener’s Good Party, clearly decided this could not hold until scheduled elections in November 2019. Hence his volte-face on early polls. His past hatred of snap elections as a betrayal and a sign of weakness underscores how drastic his decision was, and therefore how vulnerable he feels.

The earlier date may take the heat off his economic policy, but it comes with its own inherent flaws. One being that AKP and his nationalist election ally are not yet consistently polling above the 50% Erdogan needs to win, hence the electoral bribe bonanza.

And, even though he is avoiding a further year and a half of possible economic deterioration, the signs of impending crisis are already clear.

The lira has so far lost more than 30 percent of its value against the dollar since last September. An unexpected but much needed emergency rate hike on May 23, when the central bank responded to record lows of 4.9 to the dollar by raising its top interest rate by three percentage points to 16.5 percent, proved only a temporary fillip.

There has been an avalanche of downgrades and derogatory commentary by rating agencies. Frank Gill, one of the most senior sovereign analysts at S&P Global Partners, which of the big agencies rates Turkey the lowest, has suggested the possibility of a further reduction in Turkey’s BB- rating—cut earlier in the month deeper into junk to the same levels as Brazil and Vietnam. Its “stable” outlook is also under threat.

Just days earlier, Fitch Ratings had sent the skittish lira down to yet another all-time low after releasing a scathing report expressing fears that political meddling would heighten Turkey’s vulnerability to tough global conditions. In March, Moody’s also pushed Turkey further into junk territory, citing the weakening of institutions and risks from its wide current account deficit amid worries about a reckless focus on short-term measures.

Bracketed with Argentina
Turkish financial analysts have begun to bracket Turkey with Argentina and speculate about whether Ankara will have to go begging to the International Monetary Fund once again. Some made comparisons to the gloomy economic period that preceded Turkey’s damaging financial crash in 2001—the worst since World War II. The reforms necessitated by that crash have at least left a stronger banking sector and a legacy of financial discipline, but that’s no guarantee that sensible measures will be put in place now to harness inflation and curb unemployment.

In the past the feeling has been—in a triumph of hope over expectation—that Erdogan’s outrageous pre-election rhetoric would, post-vote, give way to a period of listening to the economic grown-ups. Now there are fewer grown-ups than ever, and those who remain have had their influence curtailed. Central Bank Governor Murat Cetinkaya keeps a lower profile than predecessors who clashed with Erdogan, while former Wall Street banker and Deputy Prime Minister Mehmet Simsek—whose calm competent speeches serve to calm investors—is regularly rumoured to be on the brink of quitting.

Ahead of the polls, Simsek has been trying to put a positive spin on the proceedings, but it was with a hint of desperation that he tweeted: “I still hope and believe that political pragmatism will ultimately prevail. A rule based market economy is the only viable option….The policy mix is more likely to improve post elections.”

Erdogan must have agreed to the latest rate hike, even though he styles himself as an “enemy of interest rates”, which he blames for inflation, against economic orthodoxy. But interest rates interfere with Erdogan’s plans for a continued credit boom and high growth, so it’s unclear whether he will sanction much more, even though the market believes that further rises are needed. In any case, Erdogan, in an interview with Bloomberg TV in London, left little room for optimistic delusions with his ill-advised comments to the effect that he would interfere more with his “independent” Central Bank once reinstalled as president, and a far more powerful president at that.

His words triggered the latest meltdown of the lira, cementing its place as one of the worst performing currencies of the year. That many of the underlying currency woes are driven by Turks’ desire to hoard dollars—as was the norm in the economic wilderness years of the 1990s—should be worrying him. Turkey’s economy has survived many ill omens partly because of global liquidity and because other emerging economies are in a worse situation, but as international conditions toughen and Turkey deteriorates, it is running out of lives.

Pressures won’t end
If Turkey survives the pre-election spend-fest, the pressures won’t end there. Renewed US sanctions on neighbouring Iran could become a headache, especially because Ankara stands accused of breaking the original sanctions with state-owned Halkbank and will be under tougher scrutiny. There could even be US sanctions for Turkey, given the anger in Congress over the agreed purchase of Russian missiles and the detention of a US pastor.

The local elections in May 2019 mean it’s unlikely  any new government would put in place any of the tough measures—from spending cuts to tax rises as well as structural reforms—needed to slow the economic decline, pushing back and thereby exacerbating the problem.

The opposition’s economic plans also offer scant hope. Most opposition pronouncements and the emerging details of their manifestoes show mostly profligacy and few answers.

“People are now asking, ‘is an economic crisis on the way?’” says veteran economist and columnist Seyfettin Gursel, director of Bahcesehir University Centre of Economic and Social Research. “Whoever comes to power after June 24, it is clear that we are going to have to pay a big price to rebalance the economy. Can we overcome our problems by paying the price and going through a period of stagnation? In order to avoid accusations of being a doom-monger, I leave it to you to draw your own conclusions.”

It hardly inspires confidence that even as the central bank bowed to orthodoxy and raised interest rates, government spokesman Bekir Bozdag, instead of calling for calm, was blaming anti-Turkish foreigners, and many opposition supporters were believing him.

Once again, Turks are left with uninspiring choices. Whoever wins and whatever happens, the economy’s problems look unlikely to be addressed willingly or with any grand plan.

As Istanbul-based broker Alnus Yatirim said in a recent note to clients (withdrawn as “a draft mistakenly sent” when it hit the headlines), in which it complained of the Turkish central bank’s (Erdogan-induced) passivity when faced with a market it should be leading and directing: “God help Turkey.”