Even Erdogan’s staunchest supporters would have shorted the lira as he won the Turkish runoff presidential election on Sunday and vowed to further entrench his decade long economic novelties that have already weakened the local currency by 90 percent, cost $200 billion in useless forex interventions and triggered a $150 billion global investor flight from the Istanbul stock and bond markets.
Turkey’s equity and currency markets rattled for two weeks and the lira slumped to 20.05 to the dollar, a new low, after the first round as businesses and investors struggled to digest the prospect of another Erdogan win in the runoff. Turkey’s five-year credit default swaps also rose the most in the world, to almost 665 basis points.
He won, of course, and cemented his place in history as Turkey’s longest serving ruler. But the lira’s been in freefall all week, dropping three days in a row and shedding 1.5pc on Wednesday alone; taking this year’s losses to about 10pc.
At the heart of the currency crisis is Erdogan’s hostile takeover of the Turkish central bank and his insistence that cutting rates is the only cure for high inflation – a policy stance that stands conventional macroeconomic theory on its head. So as the whole world went on a rate hike spree over the last year or so to control price levels not seen in 40 years, Turkey went the other way, cutting rates aggressively with at least four central bank governors shown the door for resisting the president’s direct orders demanding lower and lower rates.
And shockingly, he based this radical departure from orthodoxy not on some brilliant new research on economic/financial data specific to Turkey, but rather his own personal interpretation of sharia compliant economics.
Back in December 2021, when sudden rate cuts wiped off half of the lira’s value in one quarter, the steepest fall for any currency in the world in that period, he brushed aside all criticism by saying that “We are lowering interest rates, don’t expect anything else from me,” and insisted that Turkey could free itself from reliance on foreign capital flows only by abandoning policies that prioritised higher interest rates and strong inflows.
“As a Muslim, I’ll continue to do what is required by nas,” he added, using the Arabic word Turks use to refer to Islamic teachings.
Just a month earlier, in November 2021, he thundered in parliament in Ankara that he could not “be on the same path with those who defend interest… We will lift the interest rate burden from citizens.”
Around that time a key Turkish business group Tusaid, an umbrella organisation of the country’s biggest businesses, called on the president to revise and reverse this completely needless policy that caused unnecessary uncertainty, spread turmoil in markets, ruined import-based production and pushed inflation above 80pc. But they were flatly told that they “won’t be able to challenge the government.”
“You are working to put in power a government that you can exploit. This nation will not allow you to do that,” Erdogan said.
This surprised everyone, needless to say, but it wasn’t the first time he used religion to deflect attention away from a lira crisis for which he was solely responsible. In 2018, when his government faced sanctions for detaining an American evangelist pastor for allegedly supporting a group blamed for the unsuccessful coup in 2016, and the lira collapsed, he simply said, “They have their dollars, we have our people, we have the lira, and we have God,” and encouraged Turks to sell dollars and gold to buy and bid up the local currency; though not very successfully.
The trend of invoking religion grew stronger as Erdogan completed two decades in power and faced his toughest challenge yet in the 2023 election. But even as analysts and onlookers took it as a desperate gambit in the face of dropping approval ratings, he still managed to bag more than 52pc of the vote in the runoff.
It shows, among a few other things, that his largely conservative, right-of-centre vote bank is willing to accept 40-80 percent inflation, a massive addition to the national debt owing solely to devaluation, a record slump in business activity and unprecedented unemployment just because they believe he is pursuing an Islamic economic policy.
They have their own reasons to want him around longer. They were pushed completely out of the picture when the country’s powerful military, fierce guardians of the Kemalist ethos, either ruled directly or played kingmaker since Ataturk gave post-Ottoman Turkey a thorough secular makeover.
Yet they realised that voting him in for a third term risked undermining the high-growth lifestyle that Erdogan himself had gifted them after decades of unending economic crises. And, in choosing between a more prudent economic model, one promised by the opposition, and one that Erdogan believed was more in tune with sharia, they chose the latter.
Bill Clinton’s nugget of political/electoral wisdom no longer applies to the Turks. It’s no longer the economy, stupid, it’s religion!
Copyright Business Recorder, 2023