Sigh. Sunday’s election in Turkey was pretty depressing. Erdogan won re-election as president of Turkey, and his coalition retained a majority in the Turkish parliament. This puts him in a dramatically more powerful position. The recently revised constitution makes the President the center of Turkey’s political system. And with this election, the office of the Prime Minister is done away with, and Erdogan is now in more full control of the country than he has ever been.
You can find an infinite number of articles talking about how bad this development is, and I largely agree with them. But I remain optimistic about Turkey, just in the longer term. Here are two things to make you feel a bit better…
First, this is exactly what we expected when the elections were announced a couple months back. I have said repeatedly in my Turkey videos that I expected Erdogan to win the next couple elections. This has happened. But over the past two months, something really exciting happened. The CHP, the party that has failed to adequately oppose Erdogan for almost two decades now, finally put up a candidate that people actually liked. Muharrem İnce is likable, has a compelling story, and actually seems to be a decent leader, which is at least two things, if not three things that the CHP’s leader Kemal Kılıçdaroğlu does not have. In the weeks leading up to the election, İnce held rallies attended by literally millions of people. This, combined with the founding of Meral Akşener’s Iyi party last year made people surprisingly hopeful.
Those hopes were dashed. The AKP, in an alliance with the (suspiciously successful) hyper-nationalist MHP party, has managed to hold onto a majority in parliament, and Erdogan himself was re-elected. This sucks. But it’s exactly what we expected out of this election before we got our hopes up. The opposition parties remain very successful in Turkey in spite of some truly extraordinary obstacles. We shouldn’t get too depressed about something we expected all along.
The Second reason not to get too depressed about this election is the topic of today’s video. Turkey’s economy is a mess. It’s been on the edge for years now, and 2018 has a good chance of being the year when it finally tips over. When that happens, whether it’s this year or next year, Erdogan will own it completely. Last week, as people were getting more excited about the possibility of an upset, all I could think about was 2015. In June of that year, Erdogan’s party, the AK party, lost its parliamentary majority for the first time. I was quite literally dancing in the streets that June. But because the opposition parties were a disaster, they couldn’t get it together to form the coalition government necessary to get rid of Erdogan. He was able to create a new crisis with the Kurds, and call a new election. He won that 2nd election in November 2015. That felt a lot worse than Sunday did. For me anyway. If the opposition had won this time, I could have easily seen that happening again. It wouldn’t have been the Kurds this time. The economy could have crashed, and as President, Erdogan could have blamed the opposition and called a new election. We’re not going to have to do 2015 again, and for that at least I’m grateful. Today’s video lays out just how difficult a time Erdogan is about to have with the Turkish economy.
Video Transcript after the jump…
Hey there. The Turkish economy is in crisis, and its a great example of how dumb markets can be. Things have been bad for a while but they got a whole lot worse on Monday May 14th. President Erdogan announced that he intended to take a larger role in determining interest rates after he wins this week’s election. And the currency tanked. When I moved to Turkey in 2011 you could buy a dollar for about one and a half lira, and today it takes almost 5.
The currency is only one of many problems with Turkey. It’s current account deficit is about 5%. This means that the economy is tremendously reliant on foreign funding. This was OK in the easy money years after the 2008 financial crisis, but interest rates are finally rising in the US and Europe, making foreign money more expensive.Turkish businesses rely on foreign money to keep operating, and its becoming increasingly clear that many of them cant pay the money back. Foreign investors are getting spooked by Erdogan’s progressively more Authoritarian government and the aggressive statements he makes on everything from the currency to his partners in NATO. Making it even worse, The Turkish economy is over reliant on massive construction projects that are largely funded by foreign money as well.
Basically the whole Turkish economy is a house of cards that may finally be about to tip over. But there’s a weird thing about this. None of this is new. Almost everything I mentioned above has been true for five years now. And folks in the international business community have been aware of the problems with the Turkish economy for years before that. But the Turkish economy has managed to tick along regardless, occasionally even putting up some decent growth numbers. It’s kind of a zombie economy.
The Turkish economy has been tremendously resilient because of that confidence issue I have been talking about in recent videos. The world’s investors know that the Turkish economy is in terrible trouble. The Turkish people do not.
Erdogan’s government and his allies now control at least 80% of Turkey’s media outlets. If you pick up a Turkish newspaper it’s still mostly good news all the time. When economic problems are mentioned they are blamed on sinister foreign powers. In the early days of Erdogan s government, back in the 2000s, his government actually did a pretty good job managing the economy, and now that they have consolidated power, they won’t let anybody talk about how badly they have screwed things up.
To be sure, Turkey’s business people, and anybody who can read English, know that there’s a crisis coming, but the bulk of Turkey’s people don’t know that. They feel richer than they have ever been, and that’s building another large problem. The average Turk has been convinced to take on an obscene amount of individual debt. Consumer debt is one of the main reasons the economy has kept ticking over. The Turkish people are confident that Erdogan will continue to deliver the goods so they are spending money they dont have. This has helped stave off the crisis. The Turkish economy kept growing, so foreign lenders kept on lending money, even though they knew they shouldn’t.
Of course this also means that when the crash comes, it will be so much worse than it would have been had it happened five years ago. Confidence is a powerful thing. The Turkish people’s confidence in Recep Tayyip Erdogan has been desperately misplaced.