Erdal Saglam: Turkey’s 2026 Economic Outlook: Between Market Optimism and Institutional Decay

In a detailed briefing on the Mesele Ekonomi platform, veteran economic commentator Erdal Sağlam breaks down the complex transition from 2025 to 2026. While financial markets appear to be basking in a “rosy” outlook driven by recent interest rate cuts, Sağlam warns of a significant disconnect between market sentiment, the Central Bank’s actual strategy, and the structural “rot” threatening Turkey’s long-term institutional stability.

Author Erdal Saglam

The Central Bank’s Battle with “Excessive Optimism”

The defining theme of Sağlam’s analysis is the Central Bank of the Republic of Turkey’s (CBRT) growing discomfort with the market’s aggressive expectations for interest rate cuts. Following a recent 1.5 percentage point reduction, the private sector and banking circles have begun pricing in a series of similar, rapid cuts throughout 2026.

However, CBRT Governor Fatih Karahan has reportedly taken a much more cautious stance in private meetings with bank executives. The Governor is actively pushing back against the narrative of consistent 1.5% cuts at every meeting, emphasizing that the bank will not hesitate to pause if the data suggests that inflation is not cooling as planned. This “caution over speed” approach is viewed as essential because the current 16% inflation target for 2026 is seen by most analysts as nearly impossible to reach. Sağlam anticipates that the CBRT will officially revise this target to roughly 19% in January to regain credibility with market participants.

The Minimum Wage Crisis: A Political and Economic Tightrope

As 2025 draws to a close, the most immediate domestic risk is the determination of the 2026 minimum wage. Sağlam highlights a concerning development: the labor unions (specifically Türk-İş) have effectively been sidelined from the negotiation table, leaving only the government and employers to dictate the rate.

While employers are lobbying for a cap around 25%, Sağlam argues that such a low figure would be socially and politically disastrous. Given that food inflation has consistently surprised on the upside—even as other indicators cooled—the “hunger limit” has risen significantly. Sağlam predicts a final increase between 28% and 30%. He warns that any figure lower than 25% would trigger a massive backlash from the AKP’s own voter base, particularly pensioners who are already living in dire conditions.

Institutional “Tefessüh” (Internal Decay)

Perhaps the most striking part of Sağlam’s briefing is his discussion of Turkey’s institutional health. He uses the term “tefessüh” (internal rot/putrefaction) to describe the state of government agencies. He points to recent investigations involving celebrities and social media influencers in illegal gambling and drug scandals, as well as the ongoing legal pressure on political figures like Ekrem İmamoğlu.

Sağlam argues that these are not merely isolated judicial events but symptoms of a system where meritocracy has been intentionally dismantled to serve interest groups. This institutional weakening creates a “fragile” environment where even a minor external shock—such as a shift in U.S. relations or a failure in the regional “peace process”—could lead to a massive economic crisis reminiscent of the “Pastor Brunson” era.

Monetary Policy and Exchange Rate Control

On the technical side, the CBRT has moved away from a truly “floating” exchange rate to what Sağlam calls a “controlled” or “managed” float. The Turkish Lira has been held at a relatively steady monthly depreciation rate, a move criticized by some economists for creating price rigidity and fueling inflation.

While the Central Bank’s reserves have grown significantly—reaching a net position of over $68 billion (including swaps)—Sağlam observes that the bank has stopped actively buying currency from the market, except for required purchases from exporters. This suggests that the bank feels its reserve position is currently sufficient, though it continues to pay a premium to exporters that adds to the bank’s overall fiscal loss.

2026: Risks and the Shadow of Elections

Looking ahead, Sağlam identifies several key risks for 2026:

1. Election Economy: As the political climate heats up, there are signs that a “hard election economy” will be implemented, potentially undoing the progress made by Finance Minister Mehmet Şimşek’s disinflation program.

2. Global Volatility: While the “Trump trade war” fears have softened recently, risks in Venezuela, Ukraine, and Israel remain wildcards for global energy prices and risk appetite.

3. Inflation Persistence: If Turkey closes 2026 with inflation still in the 23-25% range, Sağlam fears the country could enter a long-term cycle of high and volatile inflation similar to the 1990s, where double-digit rates become a permanent fixture.

Conclusion

Sağlam’s message for 2026 is one of cautious pessimism. While the “rosy” atmosphere in the banking sector and the steady increase in reserves provide a temporary cushion, the underlying institutional decay and the looming pressures of the minimum wage and election cycle suggest that Turkey’s economic recovery is on thin ice. For international investors, the key will be watching whether the CBRT can maintain its independence against political pressure for rapid rate cuts as the 2026 target inevitably shifts.