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Turkey : Economic Outcome and Elections : Interview with Dimitri Bettoni from OBCT ( https://www.balcanicaucaso.org/eng/Areas/Turkey/Turkey-Economy-and-Elections-188693)

TARİH: 22 Haziran 2018 0:00

You will find below the original interview done by Dimtri Bettoni with Turabder’s President Gül Günver Turan which was later on shortened to fit the required 10.000 characters. The final interview can be found on the website of the Ossevatorio Balcani e Caucaso Transeuropa. (https://www.balcanicaucaso.org/eng/Areas/Turkey/Turkey-Economy-and-Elections-188693

Turkey's Current  Economic Situation.

What are the current strenghts and weaknesses of the Turkish economy?

The following traits stand out when looking back at recessions and financial crises the Turkish economy have gone through in the past: Resilience characterized by a readiness for revitalization, recuperation, and recovery. Add to these a strong belief in the future, strong enterpreneurial spirit, a business friendly environment, readiness to use new technologies, an energetic workforce, close family ties allowing for support systems to operate, all allowing  recovery to be more rapid than expected. This ability to withstand and cope with shocks, this bouncing back is unfortunately hampered today by vulnerabilities, weaknesses  caused by  both external and internal economic shocks. These shocks are not only a result of intrinsic features of Turkey’s economy but are also due to a lack of good governance and sound macroeconomic management.

Turkey is an export oriented economy easily affected by external shocks such as sudden drops in foreign demand. Its domestic economy is dependent on strategic imports such as gas, oil and raw materials whose prices are currently on the rise. The resulting current account deficit amounts to 57 billion dollars between March 2017 and 2018. Low domestic savings has led to high dependency on foreign savings. Foreign direct investments and portfolio investments are not as high as may have been wished, constituting a major problem at a time when  repayment of foreign debt in 2018 amounts to 240 billion dollars, To make things worse,  domestic capital outflow has increased while Turkish firms operating abroad have become more reluctant to send their earnings back to Turkey.  Shortage of hard currency is also exacerbated by the perception by both domestic and foreign actors that there is a weakening of the rule of law and deterioration of the judicial processes.

How can  the weakness of the lira be explained

The weakness of the TL can be explained by the large amount of foreign debt, an increasing current account deficit, low rates of foreign direct and portfolio investments and fear of the future while the Central Bank remains dormant.  Article 4, part II of the Law on the Central Bank of Turkey entitled defining the “Fundamental Powers of the Bank” stipulates that  the Bank, with the objective of maintaining price stability, shall be authorized to use monetary policy instruments described in this law and also determine and implement other monetary policy instruments that it deems appropriate. De jure the Central Bank is independent but de facto it has taken its clues from President Erdoğan who favors the lowering of interest rates.  His insistence that inflation is a result of high interest rates and therefore interest rates should be lowered has accelerated the run on the currency.  At a time when there is an increasing demand for foreign exchange and interest rates are below inflation rates, the logic of economics would dictate a rise rather than a drop in the interest rates.

The Central Bank raised the interests twice last weeks. Why precisely now?

And what did President Erdogan mean when he spoke about bringing monetary policy more under the government’s control? With what consequences?

 It is only when the  TL  hit a record low of 4.9290 against the US dollar that the Central Bank finally decided on tightening monetary policy and raised interest rates. The President’s recent declaration that he would take greater control over monetary policy after the presidential and parliamentary election has once again speeded the selling of TL holdings, but the Central Bank’s determined stand and its increasing of rates a second time have helped a modest recovery of the TL. How long lived this will be we shall have to see... The trend is presently upward. After all, the fever (inflation) is not yet down but at least the termometer (interest rate) is now allowed to show how high this fever is. Can we attribute any logical meaning to what was said by the President during a political rally? It is as if he wished exchange rates to skyrocket again...It may be that he was misguided by his personal economic advisors who thought that Neofisherism could apply to Turkey, characterized by an overheated economy with high rate of inflation and in great need of foreign exchange.

How has this affected the economy?What part of the Turkish society is at the moment suffering the most and what part is gaining advantages

The burden of businesses who had contracted foreign debt denominated in dollars or euros has now increased. The State itself faces the same problem when repaying public debt. Export and imports can both be negatively affected by the depreciation of the TL since the exchange elasticity is negative.  Gas, oil and raw material imports have become more expensive which will fuel even more inflation in the coming months.

A report published by DISK ( Confederation of Progressive Trade Unions of Turkey entitled “Labour under the AKP” emphasizes that trade union rights were violated, strikes prohibited, social security benefits reduced, income distribution deteriorated unfavorably against workers, unemployment grew, the tax burden of workers has increased as indicated by the share of indirect taxes in total taxes going up to 65% in 2017. We can therefore say that the income of Turkey’s low income groups have not improved. Any winners? These days, there seem to be more losers than winners  except for those who held their earnings and savings in gold and/or  foreign exchange.

Why is the government insisting so much in pursuing economic growth despite its high costs in term of inflation and the loss of value of the currency?

The insistence is due to the obligation the President feels to realize the Vision 2023 plan he had made public in 2011. The vision consists of a list of economic, political and social goals  to be achieved by 2023, the centennial of the Republic. The major economic goals were to move up Turkey from a middle income to a high income country with a GDP per capita of 25,000 dollars, allowing Turkey to become the 10th largest economy in the world, tripling its exports to 500 billion US dollars, develop ten globally recognized Turkish brands  and complete accession negotiations with the EU.  

Although Turkey has a well functionning market economy and has achieved a strong growth in 2017 coupled unfortunately with high current account deficit and double digit inflation, it is far from achieving these goals.  The  spectacular growth attained so far is unsustainable since it was realized mainly by government guarantees encouraging loan expansion, by tax incentives and by boosting private consumption. This policy has simultaneously fueled imports of consummer goods.  We are in an election year and the government, naturally wishing to win the elections, can not afford to tell its constituencies that this growth is only temporary and that inflation can only be controlled if growth rates are lowered. Ensuring sustainabilitiy of high growth rates can only be achieved with higher domestic saving rates, higher investments and less dependency on foreign capital inflows.

President Erdoğan also  voiced the possibility of the creation of a national rating agency. How would you evaluate this move? 

In March 2018 the Head of the Banking Regulation and Supervision Agency (BDDK), at a press review also talked about the establishment by Turkish banks of such a  credit rating agency which would become operational within a few years. Would such a national agency be truly independent, impartial and in compliance with international standards, would it be trusted by international investors it its reports contradict those prepared by international rating agencies, I seriously doubt it.

 Is Erdogan consciously putting Turkey's economy in a dire situation in order to pursue an ideological agenda that aims at severing the bonds with the West?

I do not think that this is his current agenda. He has realized now that not much can be achieved by siding up solely with the sunni Arab world, that Russia by itself is not a reliable party, that China has still a long way to go and that Africa is still too small a market. He also realizes how costly it can be to severe bonds with the West since 70% of foreign direct investments comes from the EU, since around 50 % of trade is conducted with it, and since recent polls indicate that more than 78 % of the Turkish people wish for the continuation of accession negotiations with the EU. Authoritarian leaders have a tendency to behave alike. Look at Trump who follows a selfish nationalistic agenda with no consideration for others including its close allies, but who will change sides and views when necessary. Opportunistic behaviour is a characteristic of the political arena in the comtemporary world.

Early Elections and the Future of Turkey

Were early elections called in by the government as an attemp to secure the control over the state before Turkey enters the storm of an economic crisis?

Parliamentary and presidential elections were supposed to take place in November 2019 with local elections taking place earlier, in March 2019. Polls showed a decline in the support for the AKP and the popularity of the President while economic indicators gave signs of a turbulence which would require drastic contractionary policies. To mitigate these fallouts, the President announced that early elections would be held on June 24. If the coalition formed by the AKP (Justice and Development Party) and MHP (Nationalist Action Party) wins the election, the constitutional referendum passed last year will allow them to move to a presidential system where the president’s power is increased, the prime ministry and council of ministers is eliminated and the powers of the parliament weakened.

How and why were electoral coalitions formed and did any of the candidates propose something you consider meaningful and appealing during this electoral campaign?

The polls indicated that the MHP might not pass the 10% national electoral threshold after the party split into two with the newly formed IYI Party (Good Party)  under Meral Akşener becoming more popular than Mr. Bahçeli’s MHP. To counter this development, the AKP passed a law enabling electoral alliances and formed  the Republic Alliance with the MHP. To their great surprise, the opposition parties, though ideologically distant from one another, also formed an alliance called the Nation Alliance, the partners being two right wing parties  (IYI : Good Party and SP: Felicity Party) and one center left party (CHP: Republican Peoples Party). During elections voters will vote for the party of their choice and if the party they voted for is member of an alliance, the percentage of the total vote of the alliance parties will be used as the figure used in determining whether the electoral threshold has been reached,  allowing smaller alliance partners to pass the 10% threshold.

A tacit agreement appears to have been concluded between the parties forming the Nation Alliance also. During the first round of the presidential election, the supporters of these three parties will vote for the candidate of their choice. If no candidate gets more than 50 % of the vote, the competition goes to a second round between the two top runners. The Nation Alliance  parties have promised to rally behind the candidate of their partners who have made it to the second round. If the Nation Alliance wins, they promise to return to a parliamentary regime and to implement a radical democratization program.

What should be Turkey's priorities in terms of economic reforms?

Difficult days await Turkey. The economy is in dire need of reforms and whoever wins the elections will be facing difficult problems and challenges. The Central Bank seems to have lost its credibility. It has acted too slowly to rein in  inflation and protect the TL.  The Treasury’s credibility is also in question. Turkey has become too dependent on short term external funds with maturation dates of less than a year. The other required political and economic reforms can be listed as follows:

  • Improvement of the judicial system
  • Bringing down inflation and interest rates below the 5% level
  • Promoting investments in high valued products and increase the share of high tech exports.
  • Promoting policies to increase investment in R&D
  • Increasing corporate and household saving rates.
  • Reducing bureaucracy and red tape

The list could be longer. Discussions in business and financial circles center on who will be responsible for the conduct of the economy after the elections. Presently none of the presidential candidates have disclosed the economy team they will be working with. Much await to be disclosed and done....

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