President Recep Tayyip Erdogan, who is campaigning for re-election, seized on the latest Turkish growth figures as a vindication of his economic policies in the face of skepticism from not only voters but international investors of the country's economic strength.
The economy grew by 7.4 percent in the first quarter, beating expectations. “We continue to be one of the fastest-rowing countries in the world,” Erdogan said at an electoral rally in Istanbul. He also claimed victory against what he called “conspirators” whom he blamed for last month’s heavy falls of the Turkish lira.
In May, the currency fell more than 10 percent as international investors fled the Turkish market over concerns about double-digit inflation and a growing current account deficit. Financial order was only restored by a steep emergency increase in interest rates, which saw the lira recoup some its losses.
But analysts warn the strong growth figures will only fuel concerns that the government policy of priming growth by massive public expenditures is unsustainable.
“The current account deficit is more than 6 percent of GDP and inflation above 12 percent, the starting point for the rebalancing process is bad, and a prolonged commitment to a tighter policy mix after the elections will be necessary to avoid further market pressure,” economist Inan Demir of Nomura Holding wrote Monday.
Tighter economic policy usually means reduced government expenditure and higher interest rates.
Turkey’s robust economy has been the bedrock of Erdogan and his ruling AK Party’s 16 years of electoral success. But despite more than a year of sustained strong growth, opinion polls have recorded voter dissatisfaction over the government’s handling of the economy.
Fifty-one percent of voters polled cited the economy as a primary concern, according to the Metropoll polling firm. Last year, security worries topped voter worries. Other polls found that a majority of voters blamed the government for their economic concerns.
“It’s a tremendous liability for Erdogan,” analyst Atilla Yesilada of Global Source Partners said. “This is an economy that grows, but not in labor-intensive way. Employment has decreased in the second quarter (2019), and things have become more expensive, and nobody is investing into new factories because loans have increased in excess of 22 percent.
“And clearly the wealth is not trickling down, whatever wealth has been created is not be felt by people on the streets, so there is a lot of public discontent,” Yesilada added.
The unemployment rate remains about 10 percent, according to recent Turkish Statistical Institute data.
Payments ahead of elections
In May, Erdogan announced two payments of over $200 for pensioners to coincide with religious holidays. The first installment is due this week, and is part of a multibillion-dollar giveaway to voters ahead of elections.
But analyst Yesilada warned the benefits of the payments are being overshadowed by the financial pain of this month's increase in interest rates.
“We all use loans, the middle class use loans to buy houses; businesses use loans to expand. Even before the latest (interest) hikes, they were already at a 10-year high. Banks have nearly stopped making new loans; we are going into a credit crunch. For me, the recession is inevitable,” Yesilada said.
The president’s challengers are focusing on economic fears.
“Erdogan can’t survive this economic crisis,” CHP Party candidate Muharrem İnce said during a rally in Istanbul Monday. “Turkey is heading to dark days. Don’t be surprised if the Turkish lira hits 8 or 10 to the (U.S.) dollar. When troubled days have come to countries around the world, they couldn’t get through them unless they changed leaders.”
In May, at the start of the presidential and parliamentary elections, the lira was less than four against the U.S. dollar. It now stands at over 4.5, peaking at nearly 5 against the U.S. dollar.
Erdogan's public construction boom, including building one of the world's biggest airports as well as some of the longest bridges and tunnels, is also now an electoral target.
"Turkey has resources, but they are in the pockets of thieves. (The government) ran up $453 billion in debt. They collected $2 trillion from your pockets. What happened in return? Did your son find a job?" İYİ (Good) Party presidential candidate Meral Aksener asked.
Analysts predict the two-pronged attack by Erdogan’s challengers over the economy is likely to intensify, as economic concerns are expected to continue to dominate the critical elections.
“This election cycle is happening against a background of a volatile economic environment with a lot of stress on the currency with uncertainty where the economy is heading. This is turning the election campaign into a less certain outcome,” said Sinan Ulgen, head of the Istanbul-based Edam think tank.
Opponents accuse the president of calling elections 18 months early in a bid to take advantage of the country’s strong growth. But many opinion polls now indicate Erdogan’s lead narrowing and being forced into an electoral runoff. Analysts warn the economy that was once the president’s most significant asset could ultimately be what ousts him from power.