With the Turkish lira at a record low against the dollar and growth stalling, President Erdogan is employing some unusual measures to keep Turkey’s fragile economy afloat. The Financial Times reports:
Last week, after intense pressure for lower interest rates from Mr Erdogan, the central bank cut overnight rates by a bigger than expected 50 basis points to 10.75 per cent. But dissatisfied by the size of the cut, in the last week the Turkish leader suggested that Erdem Basci, central bank governor, was under foreign influence, has equated high interest rates with “selling out the homeland” and told the bank not to accede to the wishes of “western powers”.[…] There are different schools of thought as to the rationale behind Mr Erdogan’s outspoken criticism of the central bank. The president argues — in defiance of economic theory — that high interest rates cause inflation. He also blames high interest rates for stalled levels of private sector investment. Another case for lower rates, made by Nihat Zeybekci, Mr Erdogan’s economy minister, is that a weaker currency helps exports.“They are basically just desperate about growth,” says Murat Ucer at GlobalSource, a consultancy. “The idea is that a low lira and low rates is the way to bring growth back at a rate that is good enough.”
The abrupt fall in Turkey’s growth and the balance-sheet shock to many companies that have liabilities in foreign countries could be much more serious for Erdogan’s power base than might appear at first glance. Erdogan has come to power with the backing of a group of Anatolian entrepreneurs and industrialists who are more pious and socially conservative than the traditionally West-looking business elites based in Istanbul. This group, with huge interests in construction, roared into new prosperity and power in Turkey during the emerging market boom. Much of the government’s “look east” or “neo-Ottoman” foreign policy reflected the hunger of these groups for construction contracts and other business in Syria, Jordan, Egypt, Iraq, and other parts of the old Ottoman zone.Hungry and ambitious companies that are new to the big time often get ahead of themselves—they over-invest and over-commit in good times and don’t have a lot of experience dealing with the inevitable downturns. It’s likely that many of the Anatolian entrepreneurs took advantage of low foreign currency interest rates and have based their plans on wildly optimistic forecasts not only for Turkey’s economy but also for the region. And what a region it is: the Balkans and the eurozone are in the tank, while Syria and Ukraine are collapsing economically as brutal civil wars rage on. Meanwhile, Erdogan has been hurling insults and vitriol at the Egyptians and at the moneyed Arabs in the Gulf.The AK Party is facing a difficult election in June, but that may not be the worst of its problems. The Turkish political opposition is deeply divided and not noted for competence, so unless the economy falls apart much faster than now appears likely, the AK Party is likely to hold onto power. And since Erdogan is now President, come what may he won’t be turned out of his ridiculous palace anytime soon.The AK’s real problem is longer term: the Anatolian bourgeoisie, as some have called the new Turkish business groups rising out of the heartland, may have gotten significantly ahead of itself, and the coming downturn could put a severe stress on the party, on its business supporters, and on Turkish society as a whole.Erdogan appears to have a plan for all this: when challenged, he cracks down harder on his enemies and attacks the free press. In the old days, hopes of joining the EU often acted as a brake on Turkish politicians looking to repress their opponents; EU membership now looks both less attractive and less likely than it has in decades. The U.S. also has very little leverage over Erdogan when it comes to human rights and Western pressure if anything is a political plus for him. Posing as the hero of Islam defying the imperialists and crusaders of the West is a role that Erdogan is very comfortable with and that many voters will applaud.So look for more political theater in Turkey and more crackdowns on dissenters, religious minorities, reporters, and quite possibly lesbian and gay Turks.Erdogan was the leading example of the “moderate Islamists” that President Obama hoped would introduce an era of democracy and peace to this troubled region. As Erdogan surveys the wreckage of his economic and foreign policy hopes, and Obama looks at the failure of his Middle East strategy, it is hard to summon up much optimism for this increasingly desperate and war-torn part of the world.