Mar 21 2018

Erdoğan growth plans to keep Turkey vulnerable – FT

Plans by Turkish President Recep Tayyip Erdoğan to keep stimulating the economy ahead of elections next year may mean the country continues to be the weak link in emerging markets as the U.S. Federal Reserve and the European Central Bank tighten monetary policy, according to the Financial Times.

“There is only one priority for Ankara and that’s growth at last year’s wild pace,” says Murat Ucer, adviser for Turkey at GlobalSource Partners, a consultancy, according to the FT. “There are big questions about whether that is possible. Even if it is possible, what kind of vulnerabilities would it create? In Turkey, there is a very clear trade-off between growth and vulnerability.”

The International Monetary Fund issued a public warning about the Turkish economy last month, prompting one of Erdoğan’s senior advisers, Cemil Ertem, to call its governors “dinosaurs” and pledging to do the exact opposite of the fund's recommended measures to tame inflation by reining in spending.

“Now with elections in his sights, some investors fear Mr. Erdoğan is unwilling to tolerate a slowdown, an approach that some fear increases the risk of a hard landing,” the FT said. “The ruling Justice and Development Party (AKP) has built its political success on the back of increased prosperity. With elections scheduled for March and November 2019, the president and his officials have made clear that they want 5.5 per cent growth this year.”

“When we are talking about how many hikes the (U.S. Federal Reserve) will deliver, how soon the ECB will end its easing, this is not a good moment for an emerging market economy to have a wide current account deficit and high inflation,” said Inan Demir, senior emerging markets analyst at Nomura, the FT reported. “It could be a big problem if global liquidity conditions deteriorate, or if Turkey has problems attracting external financing because of political or geopolitical risks.”

Investor concerns are heightened by the political leadership in Turkey, where power is increasingly centred around Erdoğan, making policy decisions unpredictable. Erdoğan has also pulled no punches when it comes to criticising the central bank for keeping interest rates high. This means the bank may react too little, too late, should the global backdrop worsen, the FT said.

Hatice Karahan, an economics professor and adviser to Erdoğan, played down the prospect of a sudden halt in the flow of foreign funds.

“Even in the worst-case scenario I would not expect any drying up in the capital flows,” she said. In the event of a slowdown, she insisted the central bank would do whatever was necessary. “If they find that rate hikes are needed, then they do it,” she said.

Karahan has earned the respect of international analysts, who see her as more mainstream than the IMF-bashing Ertem or Yigit Bulut, another economic adviser, who once said foreign powers were trying to use telekinesis to kill the Turkish president, the FT wrote.

“Many, however, question her influence. The concern is that, despite a cadre of well-respected technocrats across key ministries, more eccentric voices around the Turkish president will drown out their advice.”

“Yes, President Erdoğan has strong views about interest rates,” Karahan said, adding: “I strongly believe that the central bank is independent.”