The victory of Turkish President Recep Tayyip Erdogan in the presidential election, held on June 24, did not thwart the challenges facing the Turkish economy at the current stage. The election coincided with growing economic imbalances in the country over the past months, including the depreciation of the currency against the dollar, as a result of the widening trade account deficit and the continued interference of the president in the monetary policy of the central bank.
Strikingly, some international institutions voiced considerable concerns about the impact of Erdogan’s victory on economic conditions, especially after the country has moved from the parliamentarian system to the presidential, following the approval of constitutional amendments in April 2017. The president is given broad powers at the expense of the parliament. Accordingly, Erdogan seeks to restructure the economy so as to subject the economic decision-making process to the presidential establishment, as well as weakening some key institutions, such as the central bank.
Economic Pressures
Although the growth rate of Turkey’s economy has risen to unprecedented levels by the end of 2017, it has not prevented the current account deficit from widening and the exchange rate of lira from falling. This has prompted many international institutions to warn that the growth of the Turkish economy is unsustainable amid these problems.
According to the Turkish Statistical Institute, GDP growth in 2017 was about 7.4%, more than double the level of 3.2% in 2016. However, between January and April 2018, the trade deficit doubled to about 27.4 billion dollars, compared to 17.6 billion dollars in the same period of in the previous year. The trade deficit in 2017 soared to 76.6 billion, compared with 65.1 billion in 2016.
Meanwhile, the widening trade deficit contributed to a decline in the balance-of-payments performance, which caused the currency to plunge and shed more than 20% of its value since the beginning 2018. President Erdogan continued to exert pressure on the central bank to cut the interest rate, having underlined on May 15 that he was determined to tighten his grip over monetary policy following the presidential and parliamentary elections.
Moreover, external debt risks have increased, hitting a record high of 453.2 billion by the end of 2017 (equivalent to 53.3% of GDP) compared to 408.195 billion in 2016 (equivalent to 47.2% of GDP). Under these conditions, the international credit rating agency Moody’s placed Turkey’s rating on review, after it downgraded its rating, on March 8, from Ba1 to Ba2. The review indicates that economic policies are not successful in addressing economic problems, amid strained political relations with key economic partners such as Germany and the US.
A Watershed
The victory of President Erdogan and the Justice and Development party (AKP) in the presidential and parliamentary elections have raised international concerns over the deteriorating situation of the country’s economy. That is particular as the country is moving into the presidential system instead of the parliamentarian, in accordance with the constitutional amendments approved in April 2017.
This comes despite Erdogan’s pledge, in his election program, to improve economic performance and address key problems that have affected the standard of living. Those problems include the high rate of inflation, as well as paying attention to education, health, infrastructure development and increasing the participation rate of women in the workforce to 49% by the end of 2023. Erdogan's plan further aims to encourage Syrians living in Turkey to return to the safe areas of northern Syria in an effort to reduce public criticism over the Syrian refugees crowding out Turks in the labour market.
Under the presidential system, the post of Prime Minister would be abolished, hence Erdogan would be able to issue decrees to form ministries and dismiss government officials without the need for parliamentary approval. In addition, the presidential establishment will oversee many of the bodies that will participate in political and economic decision-making.
According to Erdogan’s remarks, economic management is to be restructured so that the number of ministries will be slashed from 26 to 16 ministries in the future, and nine subsidiary bodies and four other offices will be tasked to propose policies in different areas including economy, which means that the presidential establishment will dominate economic decision-making.
Possible Consequences
Despite the rise of Turkish lira -immediately after the elections- by more than 3% to reach 4.54 against the dollar, the possible changes in the shape and structure of the country’s political and economic management have raised suspicions among many economic circles. There are doubts as to whether Erdogan will introduce new macroeconomic policies that would alleviate the economic problems in the country, given that he has vowed -before the elections- to control the economy.
According to one estimate, there are growing pressures on the performance of economic institutions, including the central bank, which may make the majority deviate from the application of sound economic policies. Yet, another estimate suggests that these changes may enable the AKP, in alliance with other parties, to put forward supportive economic policies for the country’s development path.
However, the party was unable to obtain a majority of the seats in parliament. According to the stated results, it obtained an average of 42% of the votes. This means it will not be able to form the government alone, which will deepen the division over internal and external policies and may increase the geopolitical risks in the country.
Based on the above-mentioned, Moody’s decision to downgrade the sovereign credit rating will depend on the policies of the new government, which will be formed by Erdogan after winning the elections, and on its ability to implement policies that stimulate sustainable growth and augment financial strength.
In conclusion, it can be argued that the prospects for the Turkish economy during the coming period will hinge on the ability of the new government to introduce economic policies that have positive results and provide a favourable climate for all economic institutions, including the central bank, allowing them the freedom to take appropriate measures that boost international confidence.
