Tide turns in Turkey as economy tumbles

Tide turns in Turkey as economy tumbles

Ekrem Imamoglu campaign signs in Istanbul_1
Ekrem Imamoglu campaign signs in Istanbul
Ekrem Imamoglu campaign signs in Istanbul


Istanbul voters dealt Turkish President Recep Tayyip Erdogan a tremendous blow last Sunday when they resoundingly rejected the country’s former prime minister and close Erdogan ally, Binali Yildirim, in his bid to become mayor of Istanbul and maintain the quarter-century grip on Turkey’s largest city that Erdogan and his allies had held.


New Mayor Ekrem Imamoglu defeated Yildirm 54 percent to 45 percent in the re-run of a vote in March that Imamoglu narrowly won. The loss amounted to Erdogan’s first major electoral defeat of his political career and a serious blow to the ruling Justice and Development Party (AKP), which Erdogan co-founded. The Turkish president and his allies had controlled Istanbul since Erdogan was elected mayor of the Turkish metropolis 25 years ago.


A variety of sentiments factored into the victory of Imamoglu, who is an emerging leader of the Turkish opposition and potential challenger to Erdogan in coming years. Surely, there was anger among the Turkish opposition over political repressions in Turkey, rule of law setbacks and the nullification of the initial mayoral election in March that Imamoglu won. Additionally, the AKP’s campaign vitriol appears to have warn out its welcome in Istanbul, and the Kurdish vote, effectively a protest against the AKP, may have helped swing the election in the opposition’s favor.


But something that cannot be overlooked is the state of Turkey’s economy, and maybe more so, its currency.


Erdogan and the AKP cemented their grip on power as the Turkish economy rapidly grew. But the outlook has changed dramatically in recent years — even as Erdogan has succeeded in winning elections and transforming Turkey into an executive presidential system. The most recent major elections Erdogan won occurred one year ago, when he became Turkey’s first executive president, and the AKP simultaneously kept control of the Turkish parliament.


Over the past year, however, inflation has skyrocketed, unemployment has risen and Turkey fell into what was, at the least, a technical recession — two consecutive quarters of negative growth.


“Clearly since last June, the economy didn’t do so well, which might explain people’s resentment to the government and switch to the opposition,” said Selva Demiralp, a professor of economics at Turkey’s Koc University and former Federal Reserve Board economist.


In an interview with Bulgaria Analytica, Demiralp said the economic downturn has impacted the AKP’s base, uneducated and young voters in particular. Youth unemployment in Turkey currently stands around 25 percent.


Demiralp said Turkey has structural problems that are driving the devaluation of the lira. Turkey has been borrowing externally and then trying to finance its growth rate, which has increased external debt, thus raising demand for foreign currency and putting pressure on the lira, Demiralp said.


The structural problems are compounded by geopolitical tensions, particularly those between Turkey and the United States. Last year, a spat between Ankara and Washington over an American pastor jailed in Turkey sent the lira plunging to 6.5 to the dollar. The lira is currently trading at about 5.8 to the dollar. Five years ago, the lira traded at about 2 to the dollar.


A currency exchange office in Istanbul
A currency exchange office in Istanbul

“Clearly it’s a pinch for our income levels,” Demiralp said. “So for the person on the street, clearly it affects your life. Even though you may not travel abroad, you may not buy imported goods, but the local inflation rate also increased to 20 percent.”


Turkey’s annual inflation rate soared to 20 percent in late 2018. It has since declined slightly.


Demiralp said inflation is impacting Turkish workers’ income levels, and this likely weighed on voters’ minds.


“If you look at income levels, they are not adjusting, they are not indexed to inflation, so most people experienced a decline in their real wages,” Demiralp said. “So yes, the economy clearly had an impact on the election results, I would say.”


The economic risk of acquiring S-400s


With election season over, the geopolitical focus on Turkey now shifts to another clash between Ankara and Washington, one with much grander implications than the jailing of an American pastor. Turkey’s purchase of Russia’s S-400 missile defense system, widely considered incompatible with NATO systems, has drawn rebuke from Washington, which has vowed to impose sanctions on Ankara should the arms deal be completed.


On Saturday, Erdogan met with U.S. President Donald Trump at the G20 summit in Japan in an attempt to talk him out of imposing sanctions over the S-400 purchase. Erdogan succeeded in garnering sympathy from Trump, who placed blame for Turkey’s choice to buy a Russian, rather than American, missile system on his predecessor, President Barack Obama.


Erdogan left Saturday’s meeting claiming Washington will not impose sanctions on Ankara. However, Trump made no such remarks, and his administration has given no indication it will not follow through on the sanctions threat if the S-400 delivery, which is set to begin next month, indeed occurs.


Four weeks ago, Demiralp attended the annual Bilderberg meeting, a gathering of western elites that this year drew NATO chief Jens Stoltenberg, U.S. Secretary of State Mike Pompeo, Trump’s son-in-law Jared Kushner and numerous other western officials and dignitaries. Following the meeting, Demiralp authored an article stating the consensus at Bilderberg was that there will be no compromise with Turkey over the S-400 deal and that, if the deal goes through, sanctions will take effect, and Turkish firms will get kicked out of the consortium that manufactures F-35 fighter jets.


While speaking with Bulgaria Analytica, Demiralp said, if Washington does sanction Ankara, the sanctions are expected to be severe and to directly impact Turkish trade, which would deal a major blow to Turkey’s already troubled economy.


“If that really happens, that would just open the door for another economic crisis,” Demiralp said. “I don’t think the Turkish economy can survive because we are already in a recessionary period, and severe sanctions as announced by the U.S. would just make it very difficult for the Turkish economy to recover.”


When asked to elaborate, Demiralp said sanctions would likely cause Turkey to experience a double-dip recession, meaning the economy would slide back into a recession shortly after emerging from one. Demiralp also said the sanctions would result in further devaluation of the lira, likely bringing it back down to 6.5 to the dollar or worse. But the sanctions would be felt in more ways than just a further loss of purchasing power.


“It won’t be just an exchange rate shock,” Demiralp said. “It will be way more than an exchange rate shock because our trade options are going to be limited.”


In general terms, Demiralp described the threat of sanctions over the S-400 deal as a big risk for Turkey.


“It’s a big threat. It’s a big risk for the Turkish economy,” said the Turkish economist.


Regardless of what transpires with the S-400 deal, Erdogan’s reign is already threatened by Turkey’s troubled economy and currency. Erdogan may need a new crisis or two — just not of the economic variety — in order to reassert himself as a leader and retain his grip on power. The trouble for him is no crisis seems to be of assistance to Turkey’s economy.


By Josh Friedman

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