The reason for Turkey’s economic precariousness—it is by far the worst performing emerging market this year—is no secret: Over the long term, markets react favorably to certainty and crumble in the face of haphazardness. In the short term, though, they have a tendency to spring up when positive news surfaces, however unlikely that news is to lead to actual benefits
It thus came as no surprise that Turkish President Recep Tayyip Erdogan’s Nov. 11 pledge to take Turkey down a new economic route drove the Turkish lira to its highest rate against the dollar in almost a month. His speech came on the heels of a shakeup in the Turkish economic apparatus, including the firing of the governor of the Turkish Central Bank and the departure of Berat Albayrak, Turkey’s finance minister and the president’s son-in-law. Although investors greeted this news with great fanfare, with both Citi and Societe Generale banks improving their outlook on the lira for the first time in a while, there is reason for caution.
The road to getting the Turkish economy back on track will indeed be a long one, requiring coherent economic policy not driven by the conspiratorial finger pointing and power politics of the last few years. It will also require a government that reins in its foreign policy adventurism, and particularly its aggression in the Eastern Mediterranean, which has severely tarnished Turkey’s relations with its largest trading partner, the European Union. As a consequence of Turkish violations of its obligations under the EU-Turkish customs union, trade has been significantly reduced.
Turkish foreign policy decisions have similarly created widespread reluctance to invest money in the Turkish market; a recent Santander investment report warned of “proximity to/exposure to conflicts in Syria and Iraq which enhance the security risk” alongside “increasing unrest and political conflict.” Only significant and concrete changes will restore investors’ confidence in the country’s ability to resolve its severe fiscal deficit and bring back the foreign direct investment the country needs.
Given the state of Turkey’s economy today, it is easy to forget that it was once an attractive option for those interested in emerging markets. But 17 years of Erdogan’s mismanagement has sent foreign money fleeing. This was particularly evident in the Turkish Central Bank’s June report, where statistics showed more than $8 billion of foreign investment being withdrawn from Turkish stocks between January and June. Total foreign investment in the Turkish stock exchange currently stands at a quarter of the $82 billion recorded in 2013. Although the capital flight was surely encouraged by the coronavirus pandemic leading investors to seek less speculative investments, Turkish economic policy has certainly not helped.
Measures eroding investor confidence have included bans on short selling, a practice where investors bet against a security, selling it now to potentially drive the price down and repurchase it later for less, and securities lending which is integral for short selling. This has taken place alongside well-founded concerns over the prospect for the nationalization of private entities. Istanbul has also placed restrictions on liquidity and derivative transactions—complex and opaque financial instruments often employed by aggressive investors with little regard for their inherent extreme volatility—all contributing to investor reluctance. Aside from measures like these that undermine the free market, Erdogan’s increasingly hostile tone towards foreign involvement in the Turkish economy since his 2018 consolidation of power, as well as rash economic statements, have not helped either.
Denying any connection between his government’s policy and Turkey’s economic collapse, the president’s rudimentary understanding of basic economic principles has bordered on the absurd. Stirring up controversy by citing Turkey’s invisible enemies, such an “interest rate lobby,” Erdogan has called out bankers advocating for higher interest rates, the issuing of government bond, currency devaluation, and other generally accepted monetary policies employed by countries seeking to lower inflation rates. Despite urgent need to do so (Turkey’s inflation rate stands at almost 12 percent) Erdogan has stood in the way.
All this is to say: Don’t get too excited for whatever course correction Erdogan has in store now. In all likelihood, it won’t reflect Turkey’s actual needs. In general, free markets simply don’t coexist with the authoritarian tendencies Erdogan’s policies have time and time again exhibited: economic manipulation; wide scale jailing of journalists critical to Erdogan’s policies; and the purging of so-called dissenters from the civil service, academia, and the justice system. A country cannot be on the path to real reform as long as the independence of its institutions is undermined by cronyism, its population hoards its savings in foreign currency out of fear of the l ira losing its value overnight, and external debt stands at over 50 percent of GDP.
The restoration of the Turkish economy will thus take far more than a speech or the replacement of some cronies with others (the newly appointed Central Bank governor, Naci Agbal, and finance minister, Lutfi Elvan, are both close Erdogan confidants and members of the governing AKP). It will require measures which although they might hurt Turkish economic pride in the short term—such as pegging the lira to the euro or the dollar and expressing a willingness to consider an IMF bailout—will certainly be conducive to getting the Turkish economy back on track. None of that will happen before the departure of Turkey’s strongman and particularly the acceptance of international bailout funds which would require Erdogan to put a stop to his patronage-focused economy. Although his second presidential term is meant to come to an end in 2023, creative interpretations of the Turkish constitution may extend the timeline, delaying impactful economic reform for the foreseeable future.
For now, Erdogan may be banking on Eastern Mediterranean gas finds to buoy the economy, but those might not have an effect for a long time. An alternative resolution would see Turkey securing a significant loan from the IMF that would surely come with transparency requirements, the cutting of excessive government bureaucracy, and credit limitations—all of which would be unacceptable to Erdogan’s pride and his supporter base, which at Erdogan’s encouragement has come to see the West as responsible for their country’s economic woes. An alternative source of funding might be cash flush countries such as China or Qatar. Despite his anti-Western rhetoric, Erdogan understands these ‘ non-economic motives and the way in which a turn eastward would negatively impact Turkey’s already strained relationship with allies in Brussels and Washington.
Three hundred years ago, Montesquieu described the Ottoman Empire as “a sick body not supported by a mild and regular diet, but by a powerful treatment which continually exhausted it.” True economic change will only come about when this exhaustion has peaked. This realization will hopefully set in before the Turkish economy completely collapses. If history teaches us anything it is that inefficient rule by despots can only persevere for so long. For the time being though, it appears that Erdogan is content to try.
Shlomo Roiter Jesner is the president and co-founder of the Cambridge Middle East and North Africa Forum (www.cmenaf.org). He is also the CEO of London-based F&R Strategy Group (www.frstrategy.co.uk), a geopolitical consultancy at the intersection of politics and business.