Turkey – Time to fasten seatbelts as Erdogan secures another term

• Recep Tayyip Erdoğan, has sealed his iron grip on Turkey. In the absence of a uturn in his economic policies, the risk of an acute currency crisis looms.

• In a scenario where Turkey ran out of foreign currency, lira’s value would likely collapse, inflation would explode and goods shortages could occur. Turkish corporates with large foreign liabilities would face rising rollover risk.

Recep Tayyip Erdoğan, a long-standing Turkish leader also known for his unorthodox economic doctrines, has secured a victory in the country’s presidential election yesterday. When almost all ballots have been counted, 52.5% of the votes went to Erdoğan and 47.8% to his challenger Kemal Kılıçdaroğlu. While the opposition leader Kılıçdaroğlu has not explicitly conceded victory, the country’s Supreme Electoral Council has confirmed the result and there is no doubt Erdoğan has secured a grip on power for the next five years.

In a country that is becoming increasingly polarised, one of Erdoğan’s biggest appeals is his strong man image. Over the coming years, he will likely continue to undermine the country’s democracy. Since a failed military coup in 2016, Erdoğan has responded with an intensifying crackdown on opposition and an abolishment of prime minister’s post. He has persistently accused the opposition for siding with terrorists and insisted that e.g. the former co-leader of Turkey’s pro-Kurdish HDP party, Selahattin Demirtas stays in prison. Going forward, Erdoğan will likely only increase the level of repression towards dissidents, hereby exacerbating what already constitutes to a brain drain out of the country.

President Erdoğan has given no signals that would lead us to expect he is planning a u-turn in economic policies. Erdoğan has acknowledged the pain from high inflation to Turkish households but he has not admitted a link between his low rate policy and high inflation. Inflation has fallen from the highs above 80% to 44% in April but will likely stay elevated, particularly as recent fall in lira will again add to imported inflation.

The recent increase in current account deficit is mostly due to imports rising faster than exports, illustrating how Erdoğan’s doctrine of exports-driven growth has not worked. Some of Turkey’s vulnerabilities are structural in nature (e.g. reliance on energy imports), but the recent rise in imports is not due to energy. In fact, the energy bill as a share of total imports has fallen from above 30% in Jan-2022, to below 20% in Mar-2023.

While Turkey does not have a public debt problem, its corporate sector has substantial foreign liabilities, and going forward, maintaining investor confidence is key. Net foreign reserves are already negative and the only thing keeping the CBRT’s nose above the water (as they are forced to intervene on lira) is their access to foreign currency from Turkish banks and Gulf states. Turkish businesses are already obliged to convert a part of their export revenues into liras and FX-protected lira deposit scheme is a way for the central bank to vacuum dollars from the public. In any case, an artificially strong currency, record CA deficit and a central bank with no credibility left is an unsustainable combination, implying that eventually something will break. Predicting the exact timing is the hard part as capital controls can always be tightened. For sure, Turkish corporates have large maturities in June and they cannot afford a stumbling investor confidence.

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