Erdoğan wary of election fallout as businesses struggle - FT

Turkish President Recep Tayyip Erdoğan is keenly aware of the repercussions of an economic downturn on support for his government at March 31 local elections.

Insiders say Erdoğan’s ruling Justice and Development Party (AKP) is concerned about losing control of the administration of Turkey’s capital Ankara at the polls, the Financial Times reported.

Banks are increasingly reluctant to lend and companies are struggling to repay some $285 billion of foreign currency debt, which has become more expensive after the lira lost almost a third of its value against the dollar last year. The country’s economy entered a recession in the final three months of 2018, squeezing profits further.

The economic contraction in Turkey could persist for more than a year, said Fatih Ozatay, a former governor of Turkey’s central bank, according to the FT.

One Turkish executive, speaking anonymously, said the government should outline an economic plan to reassure markets once the elections are over. No more elections are planned for four years, giving the government a wide window to enact reforms.

“There are many things going for this country,” Ozatay said. “We need some adjustment to get growth coming from exports rather than domestic consumption and real estate development. That needs to stop.”

Economists say Turkey may be experiencing a much longer recession than its usual V-shaped slump and recovery. Even an _L-shaped scenario could be on the cards due to the burden of debt on the country’s banks, the FT said.

 “Traditionally . . . lending has picked up quickly,” says Roger Kelly, the senior economist for Turkey at the European Bank of Reconstruction and Development, or EBRD, in Istanbul. “But when banks are deleveraging, you can’t expect them to lend their way out of a slump.”

Turkey doesn’t have the money to spend its way out of its recession and any divergence from budget discipline promised by Treasury and Finance Minister Berat Albayrak, Erdoğan’s son-in-law, could be punished by investors.

“It’s still fragile,” says Nora Neuteboom, an economist at the Dutch bank ABN Amro, the FT reported.

More companies are applying for bankruptcy and banks are seeing a steady increase in non-performing loans. A December stress test by the Turkish authorities predicted that NPLs could peak at 6 percent from about 4 percent currently but some analysts are predicting much higher rates.

“You need a mechanism that will take the exchange rate risk and risky loans off the balance sheets of the corporates and the banks,” said Zumrut Imamoglu, chief economist at TUSIAD, Turkey’s biggest business association. “This debt could be taken over by the government to some extent, or by the market, if there’s anyone willing.”

The government, short on cash after a series of tax cuts, has yet to come up with such a plan. Insisting all is well is unlikely to satisfy nervous investors.

“The markets still have concerns around the banks’ balance sheets,” said Okan Akin, an emerging markets analyst at AllianceBernstein. “To restore confidence it is important to draw a line . . . to say: these are the problems, we’ve solved them and now they are in a position to start lending again.

“The easiest thing would be to just go to the IMF to talk to them on a technical level,” Akin said. “They don’t even have to make an agreement; just use them for some credibility.”

Erdoğan has repeatedly said any IMF help is out of the question, leaving the country in a possible financial dilemna.