Turkey’s Failing Economy Poses Risk For Erdogan’s Popularity

Turkish president is the most popular politician in modern Turkey, and one of the key factors underpinning his approval rating is the firm economy that he worked to maintain in more than a decade of his rule.

The economy that enabled President Recep Tayyip Erdogan to win nearly a dozen elections in the 21st century could also spell an end to his rule if it goes south. The Turkish government had long been expecting a decline of its flourishing economy, but they were aiming for a soft landing to avoid public anger and sudden outflow of foreign investments.

Since then, Turkish authorities have announced a series of promotion packages to boost foreign investment and help small entrepreneurs. None of them could help arrest rapid decline of the Turkish lira and the freefall of the local currency accelerated as Turkey started a new year.

Most of the blame goes to the uncertainty. Since 2013 anti-government protests, Turkish politics has never stabilized. From 2013 corruption scandal and never-ending elections to the July 15 coup attempt, political uncertainty contributed to hesitation of foreign investors. Post-coup purge of public workers, extended to the Central Bank and other financial watchdogs, raised fears that Mr. Erdogan will fill these positions with loyalists who favor lower interest rates.

Nearly 700 companies, including giants such as Koza Altin and Boydak, were seized by the government. Foreign investors are unable to predict if their Turkish partners could be arrested and their companies seized before signing any deals. Akin Ipek, Koza Altin’s owner with estimated $7 billion wealth, fled to Britain. Five of his media outlets were shut down just 3 days before parliamentary elections in 2015.

Fearing a similar takeover, Yildiz Holding, which owns chocolate giant Godiva, shipped 21 percent of its shares abroad last month, prompting to speculations that he is jumping the sinking ship.

Another major factor that scares off investors is the worsening security climate in Turkey. With nearly two dozens of bombing attacks across Turkey, the country is less secure than it was in the past. It also reduces the number of tourists visiting Turkey, a major source of revenue that is usually used to fix budget deficits.

This week’s parliamentary sessions in which lawmakers vote on constitutional changes to shift to the presidential system also contributed to the political uncertainty. Observers have a hard time predicting what will happen if constitutional changes are rejected in the referendum or if early elections are called. This uncertainty only helped Turkish lira depreciate further 12 percent this year, adding to concerns that Fitch is going to downgrade Turkey from an investment grade to junk later this month. Other two major credit-rating agencies — Moody’s and S&P — have already done so.

During the global financial crisis in 2009, Turkey’s economic success story saw only a slight setback. Since Federal Reserve lowered borrowing rates to boost recovery in the U.S., Turkish businesses had benefited extensively. Turkey’s credit-driven economy will significantly hit a snag throughout this year as Fed is planning to hike interest rates for 3┬átimes.

Private sector debt and chronic current account deficit are threatening the economy, and reliance on foreign money only further exacerbates this danger.

Economic textbooks would require central banks to immediately raise interest rates to shore up a local currency and arrest growing inflation. But Turkey’s Central Bank is reluctant to increase rates in the face of non-stop pressure by Mr. Erdogan. Last week, Mr. Erdogan said there is no difference, where aims are concerned, between terrorists who holds a gun and weapon in their hands and terrorists who hold the dollar, euro, and interest rates.

As President Erdogan is heading to one of the most crucial referendums in his political career, an economic crisis is the last thing he would want. In Turkey, employment historically brings more votes than higher inflation — two options politicians are forced to choose from. Mr. Erdogan believes inflation could be fixed through more foreign direct investment later, but higher interest rates make Turkey less attractive to foreign money and slow down the economic growth. It is especially bad at a time when Mr. Erdogan is pandering to more voters.