On the morning of 6 February 2023, following the earthquake that hit 11 Turkish cities – home to 16.4% of Turkey's population and responsible for 9.4% of its economy – which killed and wounded tens of thousands of people, not to mention the massive destruction in terms of urbanism and economy, many Turks, and also the world, thought the disaster would be the final straw for the 20-year-old administration of Turkish President Recep Tayyip Erdogan.
After all, it was the 1999 Izmit earthquake that paved the way for this administration, given the failure of its predecessor's economic management to deal with a major crisis that led to the deterioration of the lira and the stock market.
Erdogan — a charismatic figure confident in his status and his ideology's entrenchment among more than half of Turks — now has a new five-year presidential term. He has served as president since 2014, as prime minister between 2003 and 2014, and as mayor of Istanbul from 1994 to 1998.
The re-elected president is almost the only one optimistic about Turkey’s ability to get out of its current economic predicament, at a time of gloomy economic forecasts.
From prosperity to collapse?
Before presenting the facts and forecasts about Turkey's economic future, it is important to understand more about the Turkish economy and the various cycles it has gone through in the past two decades.
A man casts his line into the Bosphorus near Turkish amphibious assault ship TCG Anadolu L400, background, anchored in Istanbul, Turkey, Thursday, May 18, 2023.
Turkey ranks 19th among the world's most powerful economies with a GDP of about $900bn in 2022, which grew 5.6% in the same year, according to World Bank estimates.
Turkey ranks 19th among the world's most powerful economies with a GDP of about $900bn in 2022, which grew 5.6% in the same year, according to World Bank estimates.
Although some attribute this growth to fake economic measures taken by the government to prop up the presidential and parliamentary elections in Erdogan's favour – the Turkish leader boasts about the prosperity he achieved in the country as GDP per capita rose from about $3,600 in 2002 to $10,650 today. (He also expected it to reach $15,000 in the coming months, he told CNN on 19 May following the first round of the elections).
This economic success relied heavily on integration into European markets, which benefited from Turkey's role as a cheap source of specialised labour in industries oriented to these markets.
Turkey has adopted ambitious reforms and recorded high growth rates between 2006 and 2017 – the rates exceeded 7%, four years after the start of Erdogan's rule and the establishment of the Justice and Development Party (AKP).
People take pictures with their mobile phones at an election campaign point of Turkish President Tayyip Erdogan, ahead of the May 28 runoff vote, in Istanbul, Turkey May 20, 2023.
These reforms contributed to a rise in income levels and a decrease in inflation and poverty by almost half. The proportion of people living on less than $6.85 a day reached just 9.8% between 2006 and 2020.
However, the momentum of reform has slowed during the past decade, leading to lower productivity, and channelling official efforts into several waves of borrowing in foreign currencies to finance the current account deficit and stimulate demand.
The foundations of the Turkish economy have been disrupted internally and externally with increasing vulnerabilities, and private sector debt has worsened, as well as the accumulated deficit in the current account. Inflation has increased, and unemployment has risen as a result of financial instability since August 2018.
Despite the growth of the Turkish economy in 2022, the unconventional monetary policies adopted by Erdogan have weakened and destablised the economy.
The massive spending that preceded the elections cannot be compensated for and reconstruction efforts haven't offset the earthquake's losses estimated at $34bn, according to the World Bank, which expects the figure to double, with economic growth of just 3.2% in 2023 and 4.3% in 2024.
Successful beginnings followed by capital flight
Foreign investment improved significantly in the early years of Erdogan's rule, leading to an average annual economic growth of 7% between 2002 and 2007.
The economy prospered again after the global financial crisis of 2008 and 2009, as interest rates fell, prompting investors to borrow and invest money in emerging markets such as Turkey in search of lucrative returns. But the last two decades were marked by foreign capital flight from the country.
The year 2013 — when GDP peaked at $957bn — was a turning point for those investors who began to pull out of emerging markets, including Turkey, as the Federal Reserve tightened its monetary policy.
A man carries food to sell in Besiktas ferry terminal in Istanbul, Turkey, Thursday, May 18, 2023.
Capital has not returned to Turkey since then, especially after the emergence of an almost one-party rule in 2017, where most powers were put in Erdogan's hands, and the independence and effectiveness of regulatory institutions were reduced, further eroding investor confidence.
Foreign ownership of Turkish government stocks and bonds according to The Economist has fallen from about 64% and 25% respectively just five years ago, to 29% and 1% at present. Investors have withdrawn more than $7bn from the Turkish stock market, according to The Conversation's website.
Foreign ownership of Turkish government stocks and bonds has fallen from about 64% and 25% respectively just five years ago, to 29% and 1% at present. Investors have withdrawn more than $7bn from the Turkish stock market.
This is perhaps the biggest indicator of the great risks surrounding the Turkish economy, and the monetary and financial instability that has prevailed in recent years. This nearly eliminates any incentives to invest in the country's economy.
Meanwhile, Turks — worried about the political future of their country — are buying gold in record quantities.
Erdogan's sustainability costs $177bn
It's not difficult to predict the prospects of the Turkish economy in the post-election period with the continuation of Erdogan's rule, who — in an interview with CNN — confidently defended his policy of reducing interest rates to curb inflation, in the shoes of an "economic expert", as he put it, although he didn't deny the likelihood of a change in economic policy.
People walk past a poster of Turkish President and People's Alliance's presidential candidate Recep Tayyip Erdogan, in Istanbul, Turkey, Friday, May 19, 2023.
He's likely to continue his monetary policies that don't match the classical universally-accepted economic equations, leading to the Turkish lira losing 80% of its value so far, (including 40% in one year) to reach more than 20 liras to the dollar.
Erdogan is likely to continue his monetary policies that don't match the classical universally-accepted economic equations, leading to the Turkish lira losing 80% of its value so far, (including 40% in one year) to reach more than 20 liras to the dollar.
This is the first time that the Turkish lira has recorded this low of an exchange against the dollar, with no visible limit for deterioration, especially with the depletion of foreign currency reserves in supporting the lira which didn't exceed $61bn last April, according to the Central Bank of Turkey.
At the same time, official data showed that the net foreign exchange reserves of the Central Bank of Turkey fell to the negative zone for the first time since 2002, at $-151.3mn on 19 May, according to Reuters.
Economists from Bloomberg have estimated that the Central Bank of Turkey has spent more than $177bn to support the lira since December 2021.
A worker counts Turkish liras banknotes in an exchange currency shop in Istanbul, Turkey, Tuesday, May 2, 2023.
That's despite the government's success in reducing inflation from 86% in August 2022 to about 44% now, but without a foundation to protect against a resurgence in inflation in the foreseeable future – signalling the country's approach to a long-term recession.
Economists have estimated that the Central Bank of Turkey has spent more than $177bn to support the lira since December 2021. That's despite the government's success in reducing inflation from 86% in August 2022 to about 44% now.
The policy of the Central Bank of Turkey is a mirror of Erdogan's policy and decisions.
Contrary to what all the central banks in the world have adopted, which — in line with the decisions of the US Federal Reserve — have raised interest rates as a means of curbing inflation, the Central Bank of Turkey has sharply cut interest rates from 19% to 8.5% as inflationary pressures began to escalate in 2021.
This is not to mention the current account deficit, which equals about 6% of GDP, while the policy of interest reduction has been accompanied by an expansion in imports to drive growth.
This is an additional dilemma that continues to weaken the lira and fuel inflation to new levels, exacerbated by the country's living and social crises amid high unemployment, especially among young people (more than 20%).
The Turkish Inflation Research Group (ENAG), which measures inflation in a basket of goods and services, recorded a 105% price increase last month compared to the same month last year; this represents an increase of almost a third compared to the beginning of 2023.
A fruit seller attends a client in a food m market in Besiktas neighbourhood, Istanbul, Turkey, Thursday, May 18, 2023
All this is happening with growing fears of a parallel currency market, where the lira is currently trading at the level of 20.53 lira to the dollar by moneychangers, away from the official rate set by the central bank daily – and no measures have been taken to address this situation for more than two months.
The opposition had expected the Turkish currency to fall to 30 liras to the dollar if Erdogan wins.
Against this backdrop, there is considerable doubt about the ruling elite's ability to continue its extraordinary measures to keep the economy running, to keep its promises to subsidise loans to smaller companies, to provide early retirement for millions of people at the cost of $13bn, and to sustain a 55% increase in the minimum wage.
If the government keeps protecting bank deposits in lira from losing their value in dollars by promising to make up for any losses, the options for doing so are virtually non-existent as foreign reserves fade.
If the government doesn't have an integrated economic package that includes detailed measures on public finances, tax systems, industrial policy, and international trade, it may not be long before the Turkish economy enters a dark tunnel.
This will make the Turkish president more open to the Gulf countries and the West, in an attempt to obtain loans or direct investments and expand Turkey's export base in order to keep economic indicators stable.
Moody's was also pessimistic in its assessment of Erdogan's economic policy and continued inflation and devaluation of the currency. It downgraded the country's credit rating, which has led to investors' aversion to Turkey. It expects Erdogan's election victory to deepen the losses of the Turkish economy.
A man standing in front of an exchange office in Istanbul, Turkey, 14 April 2023. The Turkish lira hit a new record low level of 19.35 liras to the US Dollar on 14 April.
According to analysts at JPMorgan: "Turkey will need to rein in inflation, protect financial stability, and put the economy on a sustainable growth path regardless of the election results."
It added that "the outlook for the country will depend on shifts in the prevailing economic trend," and "if traditional policies are adopted, the treatment of inflation will be faster."
Erdogan, however, took another view, saying in an interview that his policy of cheap lending would continue.
The $1tn economy
It's important to note that Turkey is a productive industrial country that plays a pivotal role in the international community — not only as a Nato and G20 member but also as a country situated at the crossroads of sea lanes and trade routes between Asia and Europe.
It still has enormous potential in various commercial and tourism sectors, given its young population and dynamic business culture. The International Monetary Fund expects the Turkish economy to reach $1tn this year, up from just $315bn in 2003.
However, in the next phase, Turkey will witness strong economic winds that will hit the country from all directions, as most analysts who follow the Turkish economic situation predict.
Will their predictions materialise? Or will Erdogan pull off a miracle and end his final term with the same glory he achieved in his first term?
