Turkey - Erdogan's game plan as economic woes continue in 2022
Overview of politics and election plans for 2023
It seems Turkey can’t get a break from negative economic headlines. On the 11th of February, 2022 Fitch Ratings has downgraded Turkey's Long-Term Foreign-Currency Issuer Default Rating to B+ from BB-, with a negative outlook. Unsurprisingly the cited reasons included high inflation and weak policy credibility.
Inflation & Foreign Exchange
Annual inflation soared to a staggering 20-year high of 48.7% in January, however, independent experts say true inflation is north of 100%.
Turkish Lira lost 44% of its value in 2021 as the central bank of Turkey cut interest rates by 5% since September down to 14%. At one point in December Lira traded above 18.00 vs USD, before stabilizing around 13.50 where it is still trading now.
Low-interest rates policy is driven by Erdogan’s push to cheapen the credit - a mantra he advocated for many years now. This however is the opposite of what orthodox Economics advocates, where high inflation is usually grappled with hawkish monetary policy and high rates. So far the strategy keeps backfiring.
The December USD/TRY exchange panic was stabilized by the government’s announced FX-protected deposits program, which tries to push savers from buying foreign currencies and instead hold savings in the Turkish Lira. This instrument initially announced for retail customers was expanded to corporates and non-residents as well. It compensates the term deposit holders if the Lira depreciation is greater than the nominal interest rate. At the moment FX-protected deposits are only 5.8% of total deposits, but corporates were expected to increase their share as well.
It is unclear what will be the efficiency of this tool as inflation is elevated to such high levels and expectations are on the negative side. It is more likely than not that the Central Bank will have to renew interventions down the road or more restrictions will be imposed on companies operating in Turkey.
Both households and businesses were impacted by hikes in energy prices from 1st January this year. Household electricity prices increased by 50% and businesses faced raises of above 120%. Nureddin Nebati, minister of treasury and finance, who assumed the office in December noted that energy prices are on the rise elsewhere as well and thanks to governments subsidies they still remain below real prices in Turkey.
The government has raised the minimum wage this year by 50%, as the protests are frequent due to declining living standards for most of the population.
On the 12th of February Turkey’s president, Recep Tayyip Erdogan announced a reduction in taxes on basic food supplies. The VAT will be lowered down to 1% from the current 8% and subsequently, the government expects retail pricing on the food to be lowered by a respective 7% as well.
Erdogan keeps insisting that Turkey's economic troubles are caused by foreign interference, the message he’s pushing for a while now. At the same time, Nebati announced a new initiative to tap into the under-mattress gold savings of households and encourage them to bring it to the banking sector. They expect the savings to be around 5,000 tons of gold, USD 250-350bln equivalent.
More actions are expected from the government and Erdogan to stabilize the current situation, which some economists predict can become unmanageable unless rates policy is used. Despite this government keeps insisting that inflation is the sole problem for the economy and reviving Tourism will aid it to stabilize further, as they see inflation returning to single digits from next year.
Meanwhile, soaring food prices have devastated the poorest people in Turkey. Excellent short video from Deutsche Welle clearly illustrates the real implications of a crashing economy:
Freedom of speech or lack thereof
Erdogan is notoriously dismissive of any type of negative media coverage. Outlets or journalists covering local politics and critical of the regime are often smeared as puppets of foreign interests. This strategy is quite common with fellow autocratic regimes (for example Russia, Belarus, and other countries with similar despotic leaders).
Since 2014, there is a relentless crackdown on journalists who dare to criticize Erdogan or anyone in his Cabinet. Tens of thousands have been convicted of the crime of insulting the president or members of his government since 2014. Overall, above 160,000 investigations were instigated and almost 13,000 were convicted for such crimes.
A vivid recent example of such prosecution was announced on February 11, 2022, when prosecutors demanded 11 years of jail time for a notable journalist, Sedef Kabas for insulting Erdogan and his ministers. Kabas, a TV journalist covers Turkish politics on the opposition channel Tele 1.
Disdain for any type of negative coverage is apparent with the dismissal of the head of the state statistics agency in late January when last year’s inflation was published at 36.10%.
Master of doubling down on his own convictions, Erdogan remains unhinged by the universal condemnation from local and international press organizations on media suppression and freedom of speech.
The Rise of Erdogan - from the 1990s to 2020s
Born in 1954, Recep Tayyip Erdogan received early education in religious Islamic vocational high school. Known to be a gifted public speaker since his student years, in 1976 he entered the world of politics. Erdogan joined the youth branch of the Islamist National Salvation Party (MSP) and later in 1983 moved to another Islamist political party - Welfare Party (WP).
Disliked and often mocked by the media, Erdogan joined the mayoral race in the local elections of 1994. Defying the odds, he was elected as Mayor of Istanbul with only 25% of popular votes. While in the office from 1994 to 1998 he solved or advanced many long-standing problems in Istanbul like water shortage, pollution, traffic issues, and garbage problems. During these years his popularity and political equity grew considerably in population, both in Istanbul and Turkey.
In 1998 Islamist Welfare Party was declared unconstitutional by Turkish courts for violating the secularist articles of the Turkish constitution and was banned from politics. Erdogan became the prominent leader of protests and was indicted for one of his public speeches, accused of incitement to violence and religious or racial hatred. Given a 10-month sentence, he served only 4 in prison in 1999.
Welfare Party members then formed and migrated to another Islamist political party – Virtue Party, which had the same fate as its predecessor. The party was found unconstitutional by the Constitutional Court and outlawed in 2001.
Realizing that the Islamist label would be an unsolvable liability for the political party, Welfare party members, joined forces with other politicians and decided to choose conservative democracy as a designation, that would appeal to a much wider audience in Turkey. Thus, AKP (Justice and Development Party) was formed in 2001. Erdogan and AbdullahGul were the leaders of the newly formed party.
At the same time, there was a severe financial crisis of 2001 in Turkey. The stocks were plummeting, Lira interest rate yields were around 3,000% and the USD vs Lira was above 1,000,000 to 1. This crisis was the climax of Turkey’s economic problems that were in making for years since the late 90s.
The multi-party coalition government led by the old generation was deemed unable to drag the country from the economic calamity. With no political equity left and the subsiding support from the public, political coalitions collapsed, and the 2002 Turkish general elections ended with the massive victory of the Justice and Development Party (AKP) and the Republican People's Party (CHP).
Erdogan was still under political ban until 2003 and AbdullahGul became Turkey's prime minister in 2002. In 2003 he handed the position to Erdogan and he has never looked back, the rule by charismatic authority began.
In 2002 Turkish economy began with signs of recovery and Erdogan, aided by finance minister Ali Babacan started to enforce many economic reforms in the country. Many government regulations were lifted and foreign investors were attracted.
Erdogan invested in education, keeping his election promises and in infrastructure, funding the road constructions, and the development of new airports. He reformed the Turkish healthcare system that considerably improved the quality of healthcare for all citizens.
These radical structural reforms aided in cooling down and controlling the tenacious high inflation that was ravaging the economy. The economic base was broadened, productivity grew and there was an apparent improvement in education and healthcare for the poorest segment of the Turkish population.
Turkey’s Gross Domestic Product grew much faster than developed economies, like France and Germany, even outpacing Poland, another fast-growing emerging markets economy.
Taking all the above into account, it is no surprise that Erdogan and AKP had support from the low-income population, with a fresh memory of the dramatic improvements in life compared to the suffering during the pre-Erdogan era.
Along the way, Erdogan endured many scandals and controversies, like the major 2013 corruption scandals, 2016 Turkish coup d'état attempt, 2015 Russian jet shootdown incident, deterioration of relations with the US, EU, and others.
Since the 2010s the economic environment began to change, now with many years in power the corruption scandals became frequent, Euroscepticism grew and there are many reports the reformed institutions that helped shape the growth in the previous decade started to deteriorate. As Erdogan and AKP government were busy tightening the grip on all major branches and institutions, the “good growth” of productivity was subsiding somewhere from 2010. As the macroeconomic environment weakened, with flat to negative real interest rates, the government moved to a spending-led growth strategy to fuel the economy.
These dynamics continued and first led to loftier current account deficits and double-digit inflation and later from 2018 to full-scale currency and debt crisis. The borrowing costs have risen, which led to loan defaults and at the same time, the Turkish Lira dived. In addition to current account deficits, the large amounts of foreign currency debt in the private sector, and Erdogan’s autocratic rule are blamed as the cause of this crisis.
Erdogan is a staunch supporter of low-interest rates, citing the importance of cheap credit for the economy - a position he still holds as of 2022. Over the years he has called high-interest rates "the mother and father of all evil", the increase of rates as “treason” and has called interest-rate banking “prohibited by Islam”. The crisis that started in 2018 is still ongoing as evidenced at the start of this article.
2023 Elections
Since 2002, AKP and Erdogan won all general and local elections in Turkey. During the last parliamentary elections in 2018 parties were allowed to contest the election under formal alliances by law specifically passed prior to the elections by the government. Erdoğan formally announced the establishment of the People's Alliance between his Justice and Development Party (AKP) and the Nationalist Movement Party (MHP). The opposition also formed the National Alliance, led by Republican People's Party (CHP), the newly formed nationalist the Good Party (IYI), the Islamist Felicity Party (SP), and the center-right Democrat Party. The pro-Kurdish People’s Democratic Party (HDP) did not join the opposition alliance and run independently.
As a result, 600 parliamentary seats were split into three: 344 for the winner People's Alliance (AKP & MPH), 189 for the National Alliance (CHP, IYI, SP), and 67 for the People’s Democratic Party (HDP).
In 2019 the Turkish local elections were also won by AKP, but they lost in three largest cities: Istanbul, Ankara, and Izmir to the opposition alliance. These important mayorship races of 2019 and ongoing economic troubles in Turkey, so far unsolved by Erdogan are giving the opposition hope for 2023 elections.
Turkeys opposition parties began preparing for parliamentary elections, scheduled for June 2023. The leaders of the six main parties met in Ankara on February 14th to initiate the plans for the grand coalition. The meeting was attended by Kemal Kilicdaroglu, leader of the Republican People's Party (CHP), Meral Aksener of the nationalist Good Party (IYI); Temel Karamollaoglu of the conservative Felicity Party (SP), Gultekin Uysal of the Democratic Party, Ali Babacan (former Finance Minister under Erdogan) of the Progress and Democracy Party and Ahmet Davutoglu of the Future Party. The coalition mentioned the readiness to meet and find common ground with the pro-Kurdish HDP party.
2023 elections will have an important symbolic meaning. It will be exactly 100 years since the treaty of Lausanne of July 24, 1923, that has led to the recognition of the sovereignty of the Republic of Turkey as the successor of the Ottoman Empire. The newly formed republic was officially declared on October 29, 1923. Mustafa Kemal Ataturk was the founding father of Turkey and the secularist policies and reforms he enforced has became known as Kemalism. Ataturk was the leader of the Republican People's Party (CHP), now the largest opposition party in Turkey, that will be the leader of the coalition in the 2023 elections. CHP believes Erdogan is the opposite of what Kemalism stands for, that he has reversed many of the secular policies, slowly shaping the traditionally secular governance into religious fundamentalist policies.
Erdogan’s Game Plan
The economic plan is to tackle inflation with control over the Lira exchange rate (abovementioned foreign exchange tools), lowering tax rates on food and further tightening the import-export flows, where possible additional requirements may come into play this year, depending on the economic data. The aim is to get to single-digit inflation by the time of the 2023 elections.
In 2022 or early 2023 the parliament is expected to introduce some new judicial reforms to the electoral system. The news about this possibility was discussed several times in 2021, mentioning the reduction of the election threshold and increasing the number of electoral districts. Here is the article from Erdogan-friendly Daily Sabbath.
At the moment the public is in dark about the possible reforms and considering the past changes (and such changes in general, by autocratic regimes) it’s safe to assume it will not be for improving the democratic elections. The possible changes in sizes and boundaries of districts just scream Gerrymandering, the tactic effectively used by the Republican party in the United States. It’s interesting how this topic will develop during this year.
Erdogan has had an alliance with MHP since 2018, but as it stands now, he will have to find more allies to succeed in next year’s elections. Also with the possible lowering of entry to 7%, it may make more sense, for MHP to run separately and then combine forces. MHP’s far-right nationalism became very focused on anti-Kurdish rhetoric as of late and this, in turn, is killing the possibility for AKP to approach HDP and maybe strike an unlikely partnership for the next elections.
As it stands now, the major election tasks for Erdogan and APK are to tame inflation, control the unpopular refugee inflow, seek new political allies, and reform the electoral system to more AKP-favouring rules.
Erdogan and the government mostly control the media narratives in the country, but the economic troubles are felt everywhere, including to his loyal base, that helped him win all elections since 2002. Unless there is some positive change to the economy, it will be difficult to sell a different media narrative to the public, though undoubtedly Erdogan will try every option available.