Concerns are growing over the health of the Turkish economy, long seen as a star performer among emerging markets, partly due to unorthodox statements by President Recep Tayyip Erdogan on economic policy that have rattled investors.
Turkey’s economic success of the past decade has been one of the pillars of the undefeated electoral success of Erdogan and his Justice and Development Party (AKP), with robust foreign investment and solid growth rates, AFP reports.
But economists now fear Turkey could be heading for an era of much lower sub-three percent growth as the AKP loses its reformist zeal ahead of June legislative elections, and Erdogan concentrates powers around the presidency after moving from the job of prime minister to head of state in August.
Farcical Row
Moreover, Erdogan has become embroiled in a sometimes farcical row with the central bank, repeatedly telling the nominally independent institution in ever more heated terms to aggressively cut interest rates despite plus seven percent inflation.
His comments unnerved markets and Turkey’s already embattled lira this week, for the first time, fell in value to the 2.50 lira against the dollar.
“At the moment, it’s not clear whether this is posturing ahead of the election or more serious. But it does raise more general concerns about institutional independence in Turkey,” William Jackson, senior economist at the Capital Economics consultancy in London, told AFP.
Erdogan has in particular raised eyebrows by suggesting that high interest rates lead to high inflation, a suggestion that flies in the face of all economic orthodoxy which assumes that lowering interest rates increases inflation by raising consumer demand.
Inflation
“Interest rate is a cause and inflation the result. But some of our friends think it is vice versa. What is the logic behind this?” Erdogan said before leaving on a trip to Latin America this week.
Central Bank governor Erdem Basci, who has stood defiant in the row with Erdogan, pointedly noted that high inflation is detrimental to growth and “the best contribution to growth from a central bank would be to maintain price stability.”
Deputy Prime Minister Ali Babacan, one of the few top AKP figures with the full respect of markets, meanwhile warned about making exchange rate policies the “subject of daily political polemics”.
The whole issue is coming to a head as Turkey presides over the G-20 group of top economies for the first time, with Babacan this week in Istanbul chairing the first meetings of finance ministers and central bank chiefs.
Fitch Ratings said the figures showed the economy’s “capacity for rebalancing” but warned its resilience “may be tested in 2015” by tighter US monetary policy or geopolitical risks.
