August 14, 2018


Turkey's Economy is on a Collision Course with Reality (Jonah Shepp, 8/14/18, New York)

Turkey's economy has been on a collision course with reality for years, as President Recep Tayyip Erdogan bought his popularity with low interest rates and cheap credit, which has fueled several years of rapid growth in the country's real GDP. Unfortunately, it has also fueled high inflation and a massive current account deficit: All that growth was greased with easily available loans in foreign currencies, and with the collapse of the lira, that debt has suddenly become unmanageable.

The Turkish bonanza of the past few years can be easily blamed on foreign financiers, who saw Turkey and other developing economies as attractive investment destinations compared to the ultra-low-interest-rate environments being maintained by central banks in the United States and Europe. Now that interest rates are beginning to rise again in these more stable economies, investors are turning away from emerging markets again. [...]

Investors are wary of Turkey largely because they are wary of Erdogan: The strongman has run the country for the past 15 years (first as prime minister, and since 2014 as president) and in that time has grown increasingly paranoid and authoritarian. He appointed his son-in-law as minister of finance last month and has attacked the independence of the Turkish central bank. Investors are rightly concerned that a more authoritarian Turkey will be a riskier place to do business.

Erdogan also believes in voodoo economics: The purpose of his recent meddling with the central bank has been to prevent it from raising interest rates, which he believes to be the cause of inflation rather than a cure for it. For a while, it was possible to write this belief off as merely a product of his recognition that low rates mean faster growth and faster growth means more votes for Erdogan. Now, however, it is increasingly clear that Erdogan's opposition to high interest rates is more fundamental and philosophical, guided perhaps by the Islamic proscription against usury.

Posted by at August 14, 2018 2:15 PM