Standard & Poor’s and Moody’s cut Turkey’s credit rating to non-investment grade, while the US dollar, which had risen 25% against the Turkish lira in 2015, continued to gain ground, especially after October. Turkey will end the year with a dollar that is 16% more expensive to buy with Turkish liras. True, the rise of the greenback was global, but the lira slid more than other currencies.
Under the Justice and Development Party (AKP), Turkey’s economic growth has relied heavily on external funds, secured overwhelmingly through borrowing that has averaged $38 billion per year. A populist, vote-boosting approach to growth has always been at the fore: “Whatever gets votes is fine!”
Focused on the construction sector and oriented toward domestic demand, the country’s economic growth provided the masses with jobs and income, even if at a minimum wage level, while opening the door wide to debt accumulation, either through consumer loans or credit cards. The government thought little of using external funds for export industries or other sectors that could earn foreign exchange. With domestic consumption driving growth, indirect tax revenues surged, contributing to increased and well-veneered spending on health care, social benefits and transport projects. With this strategy, the AKP was not only creating its own bourgeoisie, but also boosting its popular support while building an authoritarian regime.
During this process, few appeared to think things might one day hit a snag. The external debt burden now stands at $421 billion. Non-financial companies have seen their net foreign exchange deficit grow 218% since 2009, climbing from $67 billion to $213 billion. With such a staggering increase, indebted companies were bound to take heavy blows from the fast rise of the dollar. Each kuru increase in the price of the dollar has added 2 billion Turkish liras ($565 million) to their debt (there are 100 kurus to the lira). From early September to late December, the greenback’s price rose from 2.96 to 3.5 liras, with the extra burden companies accumulated because of this amounting to $30 billion.
The rise of the dollar was propelled not only by the flight of short-term foreign investors, but also by locals who converted their savings from Turkish liras to dollars. Foreign exchange now constitutes 40% of deposits. President Recep Tayyip Erdogan led a campaign calling on citizens to “return to the Turkish lira,” but it seems to have had little effect.
Although 2016 was a turbulent year for Turkey, what 2017 will inherit from it is even more chilling. There is no sign that Turkey’s risk aggregate will decrease in the coming year. The winds blowing at home and abroad appear more likely to cause serious damage rather than help the country keep its ship afloat. Donald Trump’s inauguration as US president on Jan. 20 and a US Federal Reserve rate hike expected in March are likely to trigger fresh capital flight from emerging economies, including Turkey. Not only the United States’ “attractiveness” but also Turkey’s “repulsiveness” will sway the decisions of short-term investors.
With no progress to remedy the downgrades of Standard & Poor’s and Moody’s, Fitch appears poised to follow suit in January. The only way to slow the flight of foreign money is for the central bank to hike rates. This, in turn, will mean a Turkey stuck in the pincer of expensive foreign exchange and high interest rates. Foreign investors’ perception of Turkey as a risky country will be further compounded by Erdogan’s push for a presidential regime.
Debate on an AKP-drafted amendment to introduce a new government system began Dec. 20 in parliament's Constitution Commission amid quarrels and brawls. The HDP and the main opposition Republican People’s Party insist the proposal flouts the fundamental tenets of democratic states and the rule of law, namely, the separation of powers and the principle of checks and balances. The draft law makes the president the sole executive power, eliminates the premiership and allows the president to remain at the helm of a political party. Presidential and parliamentary elections would be held simultaneously, and the president would have the power to dissolve parliament and declare states of emergency, along with other non-democratic authorities concentrating executive and judicial power in one person's hand.
Opposition to the draft is growing inside and outside parliament amid speculation that even some members of the AKP and its partner, the Nationalist Action Party, might withhold support from the bill during the vote in the general assembly. If the bill manages to muster support from 330 deputies in the 550-seat legislature, it would be presented in a referendum in March or April, meaning that most of the first half of 2017 would be consumed by the political turbulence surrounding the presidential regime, which in turn would further increase Turkey’s risk premium.
The Turkish economy shrank by 1.8% in the third quarter of 2016, and a number of advance indicators suggest the contraction has continued into the fourth quarter as well. These include a drop in industrial output, the backbone of gross domestic product, a worsening unemployment rate, a decrease in imported inputs and equipment and lower indirect tax revenues, which point to a slowdown in consumption. As a result, the Turkish economy’s overall growth this year is likely to be around 1.5%, well below the government’s target of 3.2%.
A crisis will officially ensue if the contraction extends to the first quarter of 2017. The harbingers are already visible: de facto bankruptcies, layoffs and workplace tensions over unmet expectations of pay raises. Further deepening concerns, households are under the strain of loan and credit card debt totaling 250 billion Turkish lira ($71 billion).
In short, Turkey is bracing for another convulsive year, and a primary goal of the AKP is to hold the referendum on a presidential system in the shortest possible time, before the crisis starts to bite voters big time in the workplace and marketplace.