Guldem Atabay
Mar 29 2018

Turkey’s economy management: which way to go?  

Turkey’s economic management could not be in more disarray these days.

Conflicting announcements by government officials are prevailing as the Turkish lira weakens due to high inflation and the widening current account deficit. Meanwhile, economic sentiment gauges are also heading south.

Cemil Ertem, President Recep Tayyip Erdoğan’s chief economic adviser, is arguing that the lira’s recent depreciation is mostly speculative. He argues that the true value of the lira is not 4.01 per dollar, as reached on Thursday, but 3.85.

At the same time, Ertem argues that calls for the government to rein in inflation and the current account deficit through rate increases are old-school, IMF-inspired ideas that bear no resemblance to economic realities in Turkey. Shrugging off calls for caution, he vehemently argues for lower rates to bolster economic growth.       

On the other hand, Deputy Prime Minister Mehmet Şimsek, a former Merrill Lynch economist who was finance minister for many years, is taking a different tack, stressing the Turkish economy’s weaknesses on every available platform. He maintains that Turkey’s double-digit inflation is feeding into lira depreciation and exacerbating problems for Turkish companies saddled with foreign debts. He argues that industrial giants that accrued wealth through large construction projects – encouraged by Erdogan himself -- should now switch their investments into technology and research and development. Over the past week, he has also argued that Turkish banks should set up investment arms to support startups instead of relying on deposits for funding. He also stresses the danger posed by Turkey’s low savings rate, which is feeding the lira’s depreciation. Simsek maintains that the only way to turn things around was through economic reform.

Turkish corporate sector debt
Turkish private sector debt to GDP

Such differing rhetoric from senior government officials is a reflection of divisions within the administration toward the economy. All rests with Erdogan and whether he decides to side with the rational approach of Simsek or the pro-risk approach of Ertem.

Still, investors in Turkey have heard similar statements from Simsek before. It might be that the deputy prime minister is merely talking to a foreign audience that is expecting rationality from the government, while he is unable to deliver it. It could be that Simsek’s statements amount to mere publicity to halt loss of blood and save the lira. Supporting this argument are the government’s deeds over the past two years, which are far from the line Simsek wants to take.

Turkish external debt stock
Turkish unemployment

It is no news that Turkey’s GDP growth rate exceeded 7 percent last year.  What is news still is the government’s insistence on keeping 2018 growth rates at 5.5 percent or above.

Şimşek is arguing that the current account deficit to GDP ratio, which exceeds 5.5 percent, is dangerously high and must be brought down to 4 percent in the short-term and to 3 percent in the medium term. But this argument doesn’t stand in harmony with the government’s aims of strong growth, rather with lower growth rates coupled with rate hikes by the central bank to cap lira weakness and slow domestic demand. Erdogan himself is against rate hikes, as is commonly known.  

Turkey is heading toward elections. Whether or not the irrationality of the government’s economic policies will allow for elections to be held as scheduled in November 2019 is open to question. While it appears the current pace of economic growth is unsustainable, therefore requiring early elections, Erdogan may be trying to hold out until 2019 as he continues a purge of the state ranks following the attempted military coup in July 2016. It appears that Simsek’s approach, while rational, will not be followed by the government.