Does Erdoğan have a plan?

It has been 15 years since Turkish President Recep Tayyip Erdoğan’s government first came to power. And it appears his administration is running out of ideas for the economy.

Back in May, returning as leader of his party following a narrow victory in a referendum on expanded presidential powers, Erdoğan pledged to reinvigorate economic reform. In a throwback to his party’s very first days in government, Erdoğan said he would ensure ministers followed strict six-monthly targets to enforce the programme’s goals.

Seven months later, the programme has yet to see the light of day.

Since 2007, when Ali Babacan left the Treasury to become foreign minister – a departure coinciding with Abdullah Gül’s appointment as president, a flourishing period of economic reform in Turkey has gradually given way to empty rhetoric and populism.

Buoyed by a flood of money sweeping into emerging markets before and after the financial crisis of 2008, Erdoğan’s government became emboldened, rolling back reforms in place since 2002 – most significantly to the central bank’s independence, off-budget spending and state tenders. Instead it turned its attention to cash and growth-generating infrastructure projects and new export markets. In 2011, Erdoğan and his ministers celebrated economic growth that outpaced even that of China.

On Monday, the government’s statistics office will probably announce that the economy grew in double digits in the third quarter, mirroring the achievements of 2011. Erdoğan is already lauding the figures as proof of the government’s economic success.

But today, Turkey finds itself in a very different place than in 2002 or indeed during those heady days after the financial crisis. There is no impetus driving investor confidence.

Instead, the central bank’s independence has been compromised. The state of emergency in place since last year’s failed coup is deterring capital inflows. Investors are worried by Erdoğan’s increasingly authoritarian behaviour. Political tensions with the United States and European Union are tainting the country’s reputation. And economic growth, set to slow significantly, is not being driven by confidence in the economy, rather a massive state-guaranteed credit scheme and government-sponsored construction projects.  

In 2002, an economic programme set by Erdoğan’s predecessor as prime minister, Bülent Ecevit, and his economy minister, former World Bank director Kemal Derviş, was already paying dividends. With Erdoğan’s election victory, Turkey at last had an apparently reform-minded, majority government to ensure the programme was implemented. Investor money began rolling into the country.

Dervis
Former Turkish Economy Minister Kemal Derviş

From banking to the budget, privatisation to central bank policy, the comprehensive set of measures would herald a period of stability and growth that, thanks to the election win in 2002, Erdoğan and his government would follow broadly, albeit with increasingly less conviction, until the financial crisis of 2008.

The arrival of the now-disgraced Zafer Çağlayan, appointed minister of trade in 2007 and then economy minister in 2011, perhaps best signifies the start of Turkey’s shift from structural reform to populist, and sometimes corrupt, economics.

Çağlayan, accused by U.S. prosecutors of taking tens of millions of dollars in bribes to cover up a scheme to evade sanctions on Iran, immediately set about challenging the position of Mehmet Şimşek, who served as minister of economy until 2009, as the government’s chief spokesman on matters of economy.

With Şimşek at the finance ministry – the former Merrill Lynch economist took over in 2009 after Kemal Unakitan, his predecessor, became embroiled in a corruption scandal -- Çağlayan became economy minister and remained until he was forced to resign because of allegations of graft in late 2013.

Although Babacan returned as deputy prime minister in charge of the economy in 2009, his clout waned significantly until his departure in 2015, amid rumours of his connections with exiled Islamic cleric Fethullah Gülen. Meanwhile, Şimşek, now deputy prime minister, talks often, but has largely failed to push through any meaningful economic reform.

Details of Erdoğan’s latest economic programme are scant. Şimşek, speaking to a finance conference in Istanbul this week, gave some clues. The government, he said, would revamp the VAT system to boost investment and restrict firms’ foreign borrowing to ease pressure on the lira, the worst performing major currency this year. But investors are basically in the dark.

And it is not clear whether the measures Şimşek outlined are merely piecemeal, or will form part of the comprehensive package of reforms that Erdoğan promised in May.

The situation in South Africa should give the government in Ankara pause for thought. Like Turkey, South Africa, with its current account deficit, political instability and corruption, is an emerging economy that investors are shying away from.

In July, the government in Cape Town announced its own economic programme. It fell flat with investors. Fitch, commenting on the plans, said many of the measures had already been announced. It warned that others, such as changes to mine ownership and a $77 billion plan to build a fleet of nuclear power stations, showed the government was tilting towards populism.

In October, Cyril Ramaphosa South Africa’s deputy president, said the government needed to come up with a new economic programme that captured the minds of investors. The country, he said, was facing an “investment strike” because of political instability, corruption and low economic growth.

The government in Turkey has said the country’s newly established sovereign wealth fund will play a central part in its economic plans. But the fund, unlike similar institutions in the Gulf, is not backed by cash from oil or natural gas. Instead, its assets comprise the government’s remaining interests in state-owned companies.

Among those assets is Halkbank, which shortly may be fined billions of dollars if U.S. regulators rule it broke sanctions on Iran. The fund needs to borrow cash from international investors in order for it to function as the government wishes. With Halkbank among its assets, it is not clear if it will be able to raise any cash at all.