Turkey facing perfect storm of COVID-19, policy missteps and a Biden presidency – top analyst

Turkey’s economic travails, symbolised by a slump in the value of the lira, could worsen as the country comes face to face with a resurgent COVID-19 virus, policy missteps by the government and a Biden presidency in the United States, according to a leading analyst. 

On Friday, Turkish President Recep Tayyip Erdoğan declared that the government would need to take more measures to combat COVID-19 after a recent surge in cases.

The Turkish authorities have already made protective masks mandatory in public spaces, limited the number of passengers allowed on public transport and imposed new restrictions on bars, restaurants and cafes across the country. Weddings, open-air concerts and other festivals have also been banned in Istanbul following a spike in infections.

Turkey’s economy has been battered by the pandemic like almost every nation across the globe. Tourism revenue has slumped, reducing the amount of foreign currency entering the country and slashing the revenue of many businesses that rely on visitors, and growth in economic activity has dived deep into the red.

Statistics from the Turkish government’s statistics agency show unemployment at 13 percent and that total gross domestic product (GDP) dropped by nearly 10 percent in the second quarter compared with the same period of last year.

Topping off these economic travails is a sharp decline in the lira against the U.S dollar. In response, the central bank has spent tens of billions of dollars of its foreign currency reserves to prop up the currency. But the lira has continued to hit successive record lows and is one of the worst performers in emerging markets.

The COVID-19 pandemic may be hurting Turkey economically just like any other nation, but what makes the country different to many is its pre-existing economic problems and the policy missteps that have helped create them.

Atilla Yeşilada, the Turkey country analyst for Global Source Partners and a consultant to leading international institutions, says that the government’s management of the economy has only made rescuing it more difficult.

“The Erdoğan administration puts ideology before solid economic ideas,” Yeşilada told Ahval in a podcast.

Yeşilada highlighted Erdoğan’s opposition to the central bank raising interest rates, which he said was based on the mistaken belief that higher borrowing costs would stoke inflation. Therefore, interest rates of 8.25 percent are actually negative in the country, when taking account of inflation of 11.8 percent.

On the economic impact of COVID-19, Yeşilada said that the pandemic was making many pre-existing problems in Turkey worse. On unemployment, many Turkish businesses harmed by the outbreak may not recover and workers who lost their jobs may not find new ones even after a vaccine is produced, he said.

Shortcomings in the education system were also making new graduates less competitive compared to their peers abroad, meaning they were ill-equipped to take on new jobs in so-called Industry 4.0 fields such as artificial intelligence.

Turkish Treasury and Finance Minister Berat Albayrak, Erdoğan’s son in law and someone who could influence the president positively, is doing little to alter the negative outlook for the country, Yeşilada said.

Responding to questions from Bloomberg this month, Albayrak once again provided a positive take on Turkey’s economic performance during COVID-19, saying it did better than many of its global peers.

But Albayrak’s optimism is masking the economic and financial issues he will have to address, particularly concerning the ramifications of the lira’s decline, Yeşilada said. Adding to the problems is Albayrak’s suspicion of foreign investors, he said.

“Albayrak does not like global capital - he thinks fund managers in Turkey are part of a global ploy to undermine the Turkish economy,” Yeşilada said.

The Erdoğan government has underlined its suspicion of foreign investors on several occasions. In 2019, when local elections were being held across Turkey, Erdoğan vowed to punish international bankers who he accused of deliberately weakening the lira to undermine his country and government.

Over the summer, Turkey’s banking regulator temporarily banned several foreign banks from short-selling Turkish assets to protect the lira, pledging to investigate possible price manipulation.

Such a stance towards foreign capital has only served to engrain investors’ negative perception of Turkey. Last week, ratings agency Moody’s downgraded Turkey’s sovereign credit rating deeper into junk territory citing the government’s economic policy missteps and a slump in the central bank’s currency reserves.

Foreign policy decisions are another factor negatively affecting Turkey’s economic outlook, particularly with regard to relations with Europe, Russia and perhaps most importantly the United States. The problem is, Erdoğan is increasingly basing his decisions on ideology rather than pragmatism, Yeşilada said.

In recent months, Turkey has engaged in a war of words with Greece and Cyprus, both of which are supported by France and the rest of the European Union, over maritime boundaries in the eastern Mediterranean and the natural gas resources believed to exist there. The United States has also warned Turkey to step back from possible military confrontation.

On Monday, Erdoğan said he was withdrawing a seismic research vessel from territories between Cyprus and the Greek island of Crete following discussions with NATO allies and insisted he was interested in negotiating with Greece to resolve the territorial dispute.

While Yeşilada said Turkish grievances over the Mediterranean – several Greek islands lie just a few kilometres off Turkey’s coastline – may have merit he predicted that the conflict there would ultimately become a frozen one.

With regard to Turkey’s relations with Russia and Iran, Yeşilada said Erdoğan’s alignment with the two countries, both in the fields of energy and politics, was less about geopolitical considerations and more about ideology.

“This is one of Turkey’s main problems,” he said. “The first is institutional collapse and the second is our international ties not making sense in terms of realpolitik.”

Turkey’s foreign policy problems are most apparent in relations with the United States, particularly as a possible Joe Biden presidency draws ever closer.

Under President Donald Trump, Erdoğan has been able to dodge many serious issues for Turkey, such as the sanctions threatened by U.S. legislators but not delivered for his purchase of Russian S-400 air defence missiles. Erdoğan has also been able to avoid U.S. reprisals for an invasion of Syria last October to fight Kurdish militants allied with the United States against Islamic State (ISIS).

Biden, a former vice president of President Barack Obama, has labelled Erdoğan as an autocrat. Biden also takes his inspiration from pre-Trump U.S. foreign policy and is therefore likely to be far less supportive of Turkey than Trump, Yeşilada said.

The U.S. presidential candidate is unlikely to shield Ankara from the economic and political repercussions demanded by senior members of Congress for harming U.S. interests, Yeşilada said.

“I think Biden will give Turkey a choice,” he said. “Will it be with NATO and the U.S in the coming multipolar world or is it going to flirt with Russia and try to stay in NATO? That is not going to work.”

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.