Faltering economy in Turkey is self-inflicted

From Deutsche Welle:

This week’s rate hike by the Turkish Central Bank helped only briefly:

After the US Fed decided to cut back on bond purchases, the lira took another tumble. But the problems in Turkey are largely self-inflicted.

It was a drastic increase in the base rate – from 4.5 percent straight to 10 percent – and with it, Turkey’s central bank in Ankara this week found itself flouting the will of Prime Minister Recep Tayyip Erdogan. Many observers saw the bank’s decision as a signal of independence from the monetary authorities. And the government made its unease clear. Erdogan himself said he rejected any further rate increases – no doubt fearing that higher interest rates would put the brakes on investment and consumption in Turkey, slowing down the economy just before local elections in March.

The pro-government newspaper “Yeni Safak” even wrote of an “interest coup” and a victory for the “interest rate lobby”:

Erdogan-speak for Turkish and foreign investors who allegedly demanded high interest rates with the goal of harming Turkey. The strident tone seemed to mask damage control: The paper warned that the government’s growth target of 4 percent could no longer be met this year, leaving Turkish businesses and consumers having to foot the bill. And, it admitted the government had been unable to prevent the lira’s fall.

Turkey is by no means the only emerging economy that is feeling the consequences of the latest decision by the Federal Reserve in Washington. India, Brazil, South Africa and other countries are also affected.

They all have benefited in recent years from the fact that international investors sought attractive locations for their money after the Fed drove down US interest rates with multi-billion dollar domestic bond purchases.

But the days of a glut of dollars in emerging markets are coming to an end: The Fed is cutting back on its bond purchases. Now that higher interest rates are looking likely in the US, many investors are pulling their money out of emerging markets. Countries, like Turkey, can indeed try to counteract this with higher interest rates – and thus higher returns for investors – but it will be an uphill struggle.

It would be too easy to blame everything on the Fed, says Sinan Ülgen, director of the independent Istanbul think tank EDAM. The Turkish growth model has failed, he said in an interview with Deutsche Welle. It was based on low global interest rates and a correspondingly large amount of capital in Turkey. “For years, it has been clear that this model would come to an end the moment central banks, like the Fed, started raising interest rates again.” The corruption charges against Erdogan’s government are also undermining political stability and scaring off other investors, he said.

  Istanbul’s stock market is under pressure as foreign capital flees the country

There is not much Turkey can now do, Ülgen said. In recent years, Ankara failed to make its economy more robust through structural reforms to increase productivity and by improving education. These are long-term changes that have an effect only after a delay of several years, he said, like Germany’s unpopular reforms in the early 2000s that ushered in the boom a decade later. In the years of record growth, Turkey failed to institute a similar reform program. “Now it’s too late,” Ülgen said. “The good times are over.”

Of course, Erdogan sees things quite differently. The economic growth of recent years plays a major role in his strategy for local elections in March and the presidential election in the summer. He voiced his opposition to a rate hike several times. At the same time, he spoke of his government’s “Plan B and a Plan C” in the event that the actions of the central bank had no effect. Newspapers speculate that Erdogan has in mind capital controls, among other things, to prevent the rapid outflow of foreign money.

But this kind of drastic intervention would ultimately inflict even more damage on Turkey, said Emre Deliveli, a business columnist for the “Hurriyet Daily News.” In future, investors would then think twice before they put their money into the country, he told DW. And capital controls are likely to be highly controversial even in the government. Erdogan would be almost certain to provoke a rebellion of his cabinet’s economic experts, such as Finance Minister Mehmet Simsek and Deputy Prime Minister Sali Babacan. “If he actually considers such measures, Deliveli said, “they will go through the roof.”

About yavuzbaydar

Yavuz Baydar has been an award-winning Turkish journalist, whose professional activity spans nearly four decades. In December 2013, Baydar co-founded the independent media platform, P24, Punto24, to monitor the media sector of Turkey, as well as organizing surveys, and training workshops. Baydar wrote opinion columns, in Turkish, liberal daily Ozgur Dusunce and news site Haberdar, and in English, daily Today's Zaman, on domestic and foreign policy issues related to Turkey, and media matters, until all had to cease publications due to growing political oppression. Currently, he writes regular chronicles for Die Süddeutsche Zeitung, and opinion columns for the Arab Weekly, as well as analysis for Index on Censorship. Baydar blogs with the Huffington Post, sharing his his analysis and views on Turkish politics, the Middle East, Balkans, Europe, U.S-Turkish relations, human rights, free speech, press freedom, history, etc. His opinion articles appeared at the New York Times, the Guardian, El Pais, Svenska Dagbladet, and Al Jazeera English online. Turkey’s first news ombudsman, beginning at Milliyet daily in 1999, Baydar worked in the same role as reader representative until 2014. His work included reader complaints with content, and commentary on media ethics. Working in a tough professional climate had its costs: he was twice forced to leave his job, after his self-critical columns on journalistic flaws and fabricated news stories. Baydar worked as producer and news presenter in Swedish Radio &TV Corp. (SR) Stockholm, Sweden between 1979-1991; as correspondent for Scandinavia and Baltics for Turkish daily Cumhuriyet between 1980-1992, and the BBC World Service, in early 1990's. Returning to Turkey in 1994, he worked as reporter and ediytor for various outlets in print, as well as hosting debate porogrammes in public and private TV channels. Baydar studied informatics, cybernetics and, later, had his journalism ediucatiob in the University of Stockholm. Baydar served as president of the U.S. based International Organizaton of News Ombudsmen (ONO) in 2003. He was a Knight-Wallace Fellow at University of Michigan in 2004. Baydar was given the Special Award of the European Press Prize (EPP), for 'excellence in journalism', along with the Guardian and Der Spiegel in 2014. He won the Umbria Journalism Award in March 2014 and Caravella/Mare Nostrum Prize in 2015; both in Italy. Baydar completed an extensive research on self-censorship, corruption in media, and growing threats over journalism in Turkey as a Shorenstein Fellow at the Kennedy School of Government at Harvard.
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