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Turkey’s Markets Prepare for Political Backlash

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Imagine you’re a president presiding over inflation that peaked at 85% late last year. Then you have the worst earthquake in modern history, with the death toll topping 40,000. And you’re up for re-election in a few months.

This is the situation faced by veteran Turkish leader Recep Erdogan. “If this were a normal country, Erdogan would be done,” concludes Matt Gertken, geopolitical strategist at BCA Research.

But Turkey isn’t quite normal, at least for a nominal democracy.

Turks got used to living with low-double-digit inflation during Erdogan’s two decades in power, and before. Real incomes were cushioned by heavy indexation of wages and pensions, and easy access to hard-currency savings accounts.

This balance didn’t withstand global postpandemic inflation, aggravated by the 68-year-old president’s insistence that low interest rates would cure high prices. “Erdogan’s voodoo economic policy has really devastated middle-income Turks over the past year or two,” says James Jeffrey, a former U.S. ambassador to Turkey who now chairs the Wilson Center’s Middle East program.

The earthquake could further damage confidence in Erdogan, who has pushed construction-led growth as an economic panacea. Collapsed buildings included some of the recently built ones. “A lot of the lives lost were an act of poor building,” says Emre Akcakmak, a senior consultant to emerging markets investor East Capital.

During a currency crisis in 2018, Erdogan’s government offered builders a “construction amnesty,” Gertken adds, forgiving noncompliance with building codes in return for a tax payment. Seemed like a good idea at the time.

No one is counting Erdogan out, though. He gets solid support on cultural grounds from religious Muslims, not least of all in the Southeastern region where the earthquake hit.

He has the luxury of choosing his opponent in elections that should take place by June. He sidelined his most formidable rival, Istanbul Mayor Ekrem Imamoglu, in December with a criminal charge for “insulting public officials.” The most likely remaining foe, Republican People’s Party leader Kemal Kilicdaroglu, looks weaker. “Kilicdaroglu is everything Turks hate in a leader,” Jeffrey says. “Overly intellectual, vague.”

In a pinch, Erdogan might postpone the election altogether as an emergency measure. Gertken predicts that he will play for time until March 2024, when local polls are scheduled.

Extra time under current policies won’t heal Turkey’s economy. The country’s current-account deficit was expected to be near 4% of gross domestic product this year, before the earthquake. Disaster recovery could cost 9% of GDP more, or about $84 billion, estimates the Turkish Enterprise and Business Confederation. The government already borrows at more than 8% annual interest in dollars, while the lira has lost half of its value in the past 16 months.

Turkish stocks did have one of their periodic rallies late last year. The
iShares MSCI Turkey
exchange-traded fund (ticker: TUR) surged by more than 70% in the fourth quarter. That looks like a one-off driven by those same voodoo economics, Akcakmak says. “When people could earn 15% to 20% on their deposits with inflation at an average of 72%, there was no alternative to trying stocks,” he says.

Investors can, and probably should, avoid Turkey. The world at large can’t. Erdogan governs a nation of 87 million on Europe’s doorstep, astride a critical trade route, a NATO member enmeshed in complex conflicts with both Russia and Iran. “The Erdogan era is over,” Gertken predicts. “But that could be a multiyear process that involves a national meltdown.”

Not good news.


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