Can The Perfect Economic Storm Change Turkey's Leadership?

For the first time in his long reign, Turkish President Tayyip Erdoğan is facing strong headwinds in his re-election bid. For one thing, the opposition has finally acquired some common sense and formed a coalition to run in the parliamentary elections. A second thing causing Erdoğan problems is that his main opponent in the presidential race – separate from the parliamentary election -- is not afraid of a fight. Muharrem Ince is copying Erdoğan’s play book by travelling around the country holding rousing rallies in the same small cities and towns that brought Erdoğan to power 17 years ago. His campaign of blasting the corruption, nepotism, and dictatorial style of Erdoğan’s regime has been gaining traction.

Can Muharrem Ince dethrone the Reis?

But it is the failing economy that has caused the major problem for the president this time. Basically, Erdoğan is making the same miscalculation of everyone who thinks good economic fortune was due to his skill rather than pure luck. For more than a decade Erdoğan enjoyed the fruits of the global economic conditions of extremely low interest rates, sharply declining oil prices, low inflation, and – most of all – plentiful liquidity, i.e. lots and lots of money sloshing around the world looking for a home that offered slightly better returns than the near-zero percent U.S. Treasury yields. A great deal of that money found its way to Turkey. How much of that money subsequently found its way to hidden off-shore bank accounts is a hot issue in this campaign.

These global conditions stabilized the Turkish lira at relatively high levels. Many Turkish businesses and government officials thought they were geniuses and started to load up on what appeared to them ‘cheap’ foreign currency debt. The favourable exchange rates encouraged all economic players to import ‘cheap’ imported goods rather than rely on local manufacturing. This was to have disastrous consequences for many Turkish businesses. But it wasn’t just manufacturing that was hit. Agriculture, once one of Turkey’s strong points, has been hard hit as well. A recent report in Al-Monitor notes that the government’s ‘cunning plan’ to limit inflation by increasing imports of ‘cheap’ agricultural goods has decimated the country’s once-powerful agricultural sector. Production is down to the point where the country has to import straw from Bulgaria and sacrificial animals for the Feast of the Sacrifice. There are even reports that one region had to import a shepherd.

Erdoğan’s economic policies are rather like the game of musical chairs. Everything is fine until the music stops. And Turkey’s economic music came to a crashing halt when those once-favourable global conditions suddenly changed. Despite the president’s constant bluster many people were well aware of the risks that Turkey was running. The country has many fine economists who have been sounding alarm bells for a long time. But inside the sound-proof bubble that surrounds Erdoğan no one heard a thing. Even if some faint sound penetrated the thick walls of flattery supporting the grandiose presidential palace it was dismissed merely as ranting of Turkey’s ‘enemies’ trying to keep the country down.

Consequently, Turkey now faces a perfect storm of economic problems:

1.     Rapidly depreciating currency.

2.     High private sector foreign currency debt

3.     Rising inflation

4.     Rising unemployment

5.     Growing current account deficit requiring even more foreign currency to cover

6.     Rising oil prices

7.     Increasing global interest rates

Despite this reality Erdoğan and his group of sycophants still try to peddle the very bizarre economic theory that reducing interest rates and boosting consumer spending is the real way to beat inflation. This is roughly equivalent to pouring gasoline on a roaring fire. A few weeks ago Erdoğan took this theory to London where he held a series of disastrous meetings with institutional investors. After politely listening to this nonsense for a while the investors quickly hit the ‘Sell’ button for the Turkish Lira sending it to historic lows. This set off alarm bells even in the presidential palace. Deputy Prime Minister Mehmet Şimşek and hapless Central Bank Governor Murat Çetinkaya were sent back to London in an effort to repair the damage. As one wag put it, it was not clear if Şimşek – who used to work at Merrill Lynch – was seeking political asylum or trying to explain the unexplainable. The currency has precariously settled at a very low level as investors wait for the next round of inflation numbers with their fingers hovering over the ‘Sell’ button on the Turkish Lira.

Tayyip Erdoğan -is the same fire there this time?

 Does all this bad economic news mean Erdoğan will lose the election? Not at all. His base of support, like Donald Trump’s true believers, is rock solid, laps up everything he says and generally accepts his version of reality. Plus, he has complete control of the media and can effectively shut out the opposition. In many ways this situation reminds me of Edwin Edwards, the former governor of Louisiana – whose politics closely resemble Turkey’s, who once bragged that  "The only way I can lose this election is if I’m caught in bed with either a dead girl or a live boy."

But for the first time the opposition is putting up a fight, chipping away at the edges of Erdoğan’s support, using his own words to taunt him and forcing him into unaccustomed mistakes. Many opposition figures estimate they will have to win well over 50% of the vote to overcome anticipated vote rigging by Erdogan’s ruling party. About 60 million people have the right to vote, and the difference created by even a small amount of rigging could shift a close result. But for the first time in many years the results are not a foregone conclusion. The June 24 election night will be interesting indeed.