Erdoğan plays high-stakes game with Turkey’s economy

The Turkish offensive into northeast Syria is likely to result in economic volatility due to the threat of revenge attacks and possible U.S. sanctions hanging over the already struggling economy.

Turkey’s economy has been suffering since limited U.S. sanctions and increased tariffs on metals sparked a currency crisis last year. Unemployment is stubbornly high – around 20 percent - the lira is still weak, while many companies and banks are saddled with high levels of debt.

President Recep Tayyip Erdoğan’s support has fallen from nearly 50 percent to between 30 and 35 percent. The presence of roughly 4 million Syrian refugees in Turkey has also fed discontent and helped the alliance of opposition parties win five out of the six biggest cities in local elections this year. That was a big blow to the network of patronage Erdoğan has built up since the mid-1990s.

Former senior Erdoğan loyalists are also in the process of forming rival parties likely to split the vote for the ruling Justice and Development Party (AKP).

In response, the president appears to have opted to try to rally the public behind him in a nationalist cause.

However, opponents of U.S. President Donald Trump’s decision to withdraw U.S. troops from the Turkish-Syrian border to allow the Turkish operation appear to be gaining ground.

Republican Senator Lindsey Graham, one of Trump’s strongest supporters, slammed the president’s decision to “shamelessly abandon” the United States’ Kurdish partners and introduced a bipartisan bill on Wednesday to sanction Turkey unless the U.S. administration certifies to Congress every 90 days that Turkey is not operating in Syrian territory.

The sanctions would target Erdoğan, his senior ministers and any foreign national who provides support to the Turkish military. The bill also targets the energy sector, demands the swift imposition of sanctions for Turkey’s purchase of Russian missile defence systems and prohibits U.S. military sales to Turkey.

Trump has also said he would devastate the Turkish economy if Erdoğan overstepped the mark in Syria.

“I do agree on sanctions, but I actually think much tougher than sanctions if he doesn't do it in as humane a way as possible,” Trump said, referring to Erdoğan’s military operation.

The meaning of “humane” in the context of Turkey’s military operation would have to be defined “as we go along,” Trump told reporters. “But if he (Erdoğan) does it unfairly, he will have to pay a very big economic price.”

The Turkish government has spoken of gaining international finance to build 200,000 homes, as well as hospitals, mosques and schools in what it calls the safe zone it hopes to set up on northeast Syria. For the ruling party this appeared to be a win-win scenario, gaining support at home for repatriating Syrians and helping the debt-ridden construction firms that have long been Erdoğan’s key backers.

Sanctions would mean big trouble for a Turkish economy already struggling to emerge from last year’s currency crisis and the brief recession it sparked. Foreign investors would again shy away from Turkey despite monetary easing in the United States and euro zone.

The weakness of the Turkish lira would prevent the central bank extending rate cuts that have already reached 750 basis points since July. If the lira weakens above the 10 to 15 percent level in the days ahead, the central bank will have to consider monetary tightening, which could reverse the economic recovery back into contraction again. 

Inflation slowed to 9.3 percent in September, but had been expected to end 2019 in double digits. Sanctions would extend the rise in inflation and Erdoğan’s aim of achieving GDP growth of 5 percent in each of the following three years would go down the drain. Turkey’s fiscal deficit, which has doubled over the past year to 3 percent of GDP, would widen, further adding to the already high-risk premium.

Erdoğan was well aware that growth was never going to reach the five percent promised by his son-in-law, Treasury and Finance Minister Albayrak, in his New Economic Programme last week and that he would have to do more to win back support.

The president has never shied away from raising the stakes and appears to be risking all to jumpstart economic growth. The very nationalist population of Turkey would stand firmly behind Erdoğan when the lives of Turkish soldiers are at stake. Only the pro-Kurdish party voted against allowing Turkish troops to enter Syria.

When economic sanctions kick in, it will be even easier for Erdoğan to sell his fictional narrative that “all the nations are against Turkey because it is becoming stronger under his rule”.

Escalating military operations in Syria would result in political turmoil at home, damaging economic sanctions. The president could use the war to bring about a very dark political transformation.