Future of Turkish Economy Depends on Erdogan

The recent Gezi Park protests, among other internal developments, could have a significant effect on the country's economy.

al-monitor Turkish lira and international currency symbols are seen over an ATM machine of a bank in central Istanbul, Feb. 1, 2012. Photo by REUTERS/Murad Sezer.

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Jun 10, 2013

We saw yesterday [June 6] how much the future of the national economy depends on Prime Minister Recep Tayyip Erdogan.

• The [ruling] Justice and Development Party's (AKP) economic policies did not change.

• There have been no changes in the ratio of budget deficit, domestic and foreign debt and current deficit to national income.

• The Central Bank is increasing its foreign currency reserves. Banks are robust. Foreign exchange keeps coming.

• Economic growth slowed but there are no major disruptions in production and employment.

But Erdogan's tough language yesterday affected the markets negatively. If he had spoken a bit softer, markets would have relaxed.

What will happen now?

It is difficult to predict the future of the economy by looking at available economic data. What will happen to the economy from now on will be determined by the words and deeds of the prime minister.

How did “Gezi Park” affect [the economy]?

In Turkey, when you say market we think of the stock market index, dollar and interest rates. Many people monitor the economy by watching these indicators.

Two winds have affected these indicators over the past two weeks. The first wind blew from the US, with the debate on whether the Federal Reserve will keep money supply loose or tighten it.

After May 31, our market was affected by the wind blowing from Gezi Park. According to tables provided by economist Mahfi Egilmez, in the period following the Gezi Park events until the prime minister’s remarks in Tunis yesterday, the Euro went up from 2.45 to 2.47 Turkish lira, and the market interest rate went up from 5.5% to 6.38% while the exchange rate for the dollar did not change and remained at 1.88 lira.

But yesterday Erdogan, speaking in Tunis to assess the Gezi Park protests, was expected to tread softly, but instead he came out strong. In a short time the indicators changed negatively, the stock market index went down, while the dollar rate and interests went up.

What happened to our magic?

Foreigners were full of praise for Turkey. Turkey was the booming economy. All were watching Turkey closely.

Such close monitoring is good and bad. There were three developments that ruined Turkey’s magic.

1. The Reyhanli bombings revealed the "foreign policy risk."  Developments to Turkey’s east were perceived as across the border risks. Syrian policy was not settled but was not seen as a risk until the Reyhanli bombs created concern abroad that Turkey was facing a serious foreign policy risk because of the Syrian events.

2. The third Bosporus bridge, the third Istanbul airport and canal projects made “foreign credit risk” a possibility. There is lots of money abroad. They are ready to extend credit but without undue risks. Foreign markets realized that the Turkish government was directing the private sector to unproductive, non-production mega projects with no assured monetary gains. Abundance of such "white elephant projects” and the need for credits suddenly upped Turkey’s credit risk.

3. The Gezi Park events put domestic political risks on the agenda. For those sending money from outside, political stability is important. Foreign markets were used to Erdogan as the unchangeable leader and the single authority. The Gezi Park protests raised doubts about  internal political issues.

Will they pack up and leave?

Foreigners won’t pack up and leave because the magic is spoiled. Foreign currency flow will not stop. Banks and the private sector will have no problems paying back their debts, but life won’t be as comfortable as before.

• It will be more difficult to find funds for "white elephant" major infrastructure projects that will not generate revenues.

• Foreign markets will be more cautious when dealing with investments, portfolios and foreign credits in Turkey.

• The terms of foreign exchange flow will be shorter. Interest rates will increase.

When shopping stops

Nobody cares about markets and shops. This is what the economy is all about. Nobody asks how the consumers, small producers and sellers are doing.  I can tell you that in Anatolia civil servants, retirees, the military, the police and teachers have reached the limits of their credit cards. Whatever they can get, they put in banks and pay their debts. There is no activity in the market. Things have been slow for four months. Shopkeepers are having problems paying debts. Fancy car and apartment sales are doing fine but their buyers are different. Don’t think the economy is doing fine because of this class of buyers.

What will happen to the dollar?

The price of the dollar is important to all of us. If the dollar rate goes up, oil and natural gas to taxi fares and bottled gas prices of many commodities and services will increase. This also has a psychological effect.

Market circles were predicting the dollar will remain under 1.90 Turkish lira before the prime minister spoke. His Tunis remarks upset both morale and calculations.

Now we are told the dollar will soon reach 1.92-1.93 Turkish lira. Watch it, if the dollar goes above 1.90 lira, it will be difficult to rein it in. 

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