Erdoğan risks economic turmoil with fast and vigorous recovery, FT reports

Turkish President Recep Tayyip Erdoğan may be leading his country toward the brink of financial and economic turmoil by gambling on a fast and vigorous recovery from the coronavirus pandemic, the Financial Times reported.

Erdoğan, who is seeking to stimulate economic growth through a credit boom, has hailed a sharp fall in interest rates and claims the steps the authorities are taking on the economy will block “malicious” attacks and make the country immune from global turbulence.

But most economists see the Turkish picture very differently, the FT said.

The central bank has spent tens of billions of dollars of its foreign currency reserves this year to maintain an unofficial currency peg. It has also slashed benchmark interest rates to 8.25 percent, below the annual inflation rate of 12.6 percent, from 24 percent in July last year, when Erdoğan sacked and replaced the bank’s governor.

But last week the lira slid to 7 per dollar, coming close to an all-time low of 7.269 against the U.S. currency reached in May, showing that the central bank’s monetary policy was floundering. Many foreign investors are cutting their holdings of Turkish stocks and bonds sharply as a result of the unorthodox policies.

Robin Brooks, chief economist at the Institute of International Finance and an ex-currency trading chief at Goldman Sachs, says Turkey is now a “complete outlier” in emerging markets, pointing to a widening current account deficit and the credit boom, which had helped spark a currency crisis in the summer of 2016.

The risk is that Turkey faces another “disorderly depreciation”, Brooks said, according to the FT. “Unless the credit push is reduced, I think the risks are building,” he said.

Pheonix Kalen, director of emerging markets at Societe Generale, said Erdoğan’s tactics may work so long as the impact of the coronavirus disappears relatively quickly, the FT reported.

But Turkish tourism revenue, a key earner of foreign currency for the country, have slumped. European Union travel warnings remain in place, meaning Turkish hotels and the wider industry are still in crisis mode. Meanwhile, exports from the country are beginning to recover, but not at the pace the government might have hoped for.

Kalen said Turkey will be left highly vulnerable to future global economic shocks unless tourism and exports recover quickly. The country earned almost $35 billion from tourism last year.

“If this current situation does continue for another 12 months, it’s not sustainable,” she said. “The Turkish authorities are balancing in this fragile equilibrium, trying not to go over the cliff.”