Creeping inflation, low consumer confidence, stubborn unemployment and a continued preference for hard foreign currency instead of local Turkish lira all underscore the Turkish economy’s vulnerability. Although it is showing signs of growth — from a 0.2 percent increase in the gross domestic product in 2019, the International Monetary Fund projects that the Turkish GDP will post a 3 percent gain in 2020 — the economy's volatility has weighed on Turkish citizens.
This sentiment is driving Ankara's commitment to maintain its assertive course in places like Syria, Libya and the Eastern Mediterranean, banking on increasing nationalist fervor from an aggressive foreign policy to distract from economic malaise. In the process, it appears willing to embrace the risk of exposing Turkey to external economic shocks such as sanctions. Even if Turkey’s government deems that it can withstand the external political and economic pressure to alter its foreign policy, over time, the rising domestic strain will eventually damage the ruling Justice and Development Party (AKP), casting greater doubt on its ability to perform well in 2023 elections.
The Turkish government's ability to reassure its citizens of the robust health of the country's economy has withered in the face of persistently weak indicators, leading Ankara to pursue a bold foreign policy agenda that appeals to nationalism.
Turkey's Economic Malaise
The recent uptick of gloomy economic indicators has added up in recent weeks, amplifying worries among Turks who have yet to recover from the economy's 2018 currency crisis, and are concerned they won’t benefit from the expected uptick in economic growth in 2020. While the rate of inflation declined and had stabilized in 2019 following its record increase in 2018, it has begun to creep up over the past few months past the central bank’s 8 percent end of 2020 target, driven by an increase in food prices that have exceeded the central bank’s predictions. Indeed, monthly increases in prices for food and non-alcoholic beverages, miscellaneous goods and services, and health-related expenditures — all key components of the cost of living — were the strongest drivers of the monthly inflation uptick. Amid those trends, unemployment has remained stubbornly high for months, so much so that the report of a 0.1 percent drop (from 13.4 percent October 2019 to 13.3 in November) was cause for celebration by the pro-government press in February. But that was hardly the improvement that President Recep Tayyip Erdogan's government has been promising, and it remains to be seen whether anticipated economic growth in 2020 will actually create job opportunities for the average Turk.
Currency volatility, another indicator of Turkey's shaky economy, could spill over into investor sentiment as well, compounding its woes. In early February, the lira exchange rate exceeded six to the U.S. dollar, a threshold widely viewed in Turkey as an indication of weakness, for the first time since May 2019. Meanwhile, the share of Turkish bank customer accounts holding foreign currencies has remained stubbornly high compared with the percentage of those held in local currency, despite consistent government messaging to spend and save using lira. The most recent data from the central bank shows that since 2018, the amount of deposits kept in foreign currency accounts has hovered around 50 percent.
Despite the positive messaging from the Finance Ministry, the actions of Turkish consumers and investors continue to demonstrate their level of mistrust in the economy. And no amount of reassurances can overcome poor economic fundamentals, with continued rosy messaging in the face of reality wearing down trust in government even further. According to Bloomberg-compiled data, foreign investors sold $3.3 billion worth of Turkish bonds over the past year, bringing their holdings in local currency debt to an all-time low.
Adding to the potential for further erosion in trust is the unconventional nature of the government’s financial policies. The IMF's positive forecast for the Turkish economy in 2020 has taken into account growth fueled by debt that will create long-term liabilities. Beyond that, Erdogan's handpicked choice for Central Bank governor is likely to continue to fulfill the president's demands that interest rates continue to be lowered — which Erdogan justifies as in accordance with Islamic tradition, not to mention advantageous for growth. This, despite the conventional monetary theory that interest rate hikes are the appropriate response to rising inflation. By continuing monetary easing despite the inflationary atmosphere, the central bank risks sparking an even sharper negative reaction among investors and consumers than already has been the case. Meanwhile, the government has issued increasing currency controls and even extended some that had been put into place during the 2018 crisis. New caps on bank fees were put into place in February to encourage banks to support the economy. The effectiveness of the interventionist policies in calming consumers and investor angst will be tested over the long term.
The Turkish government cannot control the domestic political toll that the weak economy will exact over the long term.
Gauging the Political Impact
Turkey’s government, and in particular the AKP, has built enough political strength through its consolidation efforts in recent years that it gauges it can withstand the growing concern over the shaky economy. And Turkey also has enough diplomatic room to maneuver to manage any threat of foreign sanctions. Despite a number of possible sanctions triggers because of its aggressive foreign policies, Turkey actually has the upper hand in many of those situations. The White House, keen to keep Turkey in NATO and retain its cooperation in a number of areas, has fought to fend off congressional sanctions over Ankara's close ties with Russia and its military actions in Syria. Even though new Turkish forays into Libya and its expanding energy exploration activity in the Eastern Mediterranean have set up new triggers for EU sanctions and diplomatic breakdowns, Turkey gauges that its power to prevent (or allow) migration of Syrian refugees into Europe and its status as a crucial NATO member will shield it from serious repercussions from the European Union.
But the Turkish government cannot control the domestic political toll that the weak economy will exact over the long term. In local elections in 2019, the AKP's first real electoral test since the economy hit dire straits in mid-2018, the party lost a pair of key contests, including the mayorship of Istanbul. The next electoral test won't come until 2023 when presidential and parliamentary elections will be held concurrently. If the economy continues to founder, the AKP could certainly lose more support. This would, in turn, put pressure on the ruling coalition between the AKP and its minority partner, the Nationalist Movement Party (MHP), possibly rupturing the coalition that gives the AKP its parliamentary majority. It’s important to watch how the AKP adjusts its policies in the coming year because this could give indications of the strength of the coalition. If the AKP makes fewer efforts to placate the ultra-nationalist MHP, for instance, or even moves to broaden its appeal to other parties, that would indicate a growing concern about its slipping popularity over economic issues.
As it works to offset the economic unease, the pursuit of aggressive foreign policy forays such as those in Turkey and Syria offer a way to stoke nationalism at a relatively low political and economic cost. This holds true especially in Syria, where the Turkish government can easily communicate widely understood national security arguments for Turkey's battle against Kurdish militants. However, the intervention in Libya, which relies in part on Syrian mercenary forces, is more distant physically than Syria — and more remote from the public psyche, factors that make it more difficult to convert into popular goodwill.
Megaprojects like the Canal Istanbul and the new Istanbul airport, which the ruling government continues to encourage over opposition complaints, are another means of distracting from economic woes. But while flashy, those infrastructural efforts are unlikely to solve the fundamental economic issues that concern the public. And so long as Turkey's economic fragility continues even as the economy itself grows, the government's popularity will continue to decline.