The current stability in the Turkish economy relies on FX-protected deposits and FX sales by state banks. Both instruments are unsustainable and have clear weaknesses in the form of strong capital outflows and a growing current account deficit. External finance channels are still open but costs are high and maturities are short. The tendency to keep savings under the pillow is an ongoing trend, albeit at a slower pace. The war in Ukraine and its global inflationary consequences are also working against Turkey’s economic stability. A new financial shock is likely, and the next one will be more damaging than its predecessors. The soundness of banking institutions and public finance could be at risk this time.
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However, the government still has additional tools at its disposal, such as changes in foreign policy, achieved with the UAE and in progress with Saudi Arabia, to obtain funding to support external deficits. When there are no more tools left, the natural outcome will be either policy normalization or stricter capital controls. The first one will require the government to admit it made a major mistake, while the second one will come as a shock to foreign and domestic investors.
AKP’s economic policies can be changed swiftly due to Erdoğan’s notorious pragmatism; therefore, it is difficult to say where this story will end. The fact is under the current government and economic system, it is impossible to have financial stability, job-creating growth, reductions in inflation, and steady domestic and foreign policies at the same time.
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Turkey’s balance-of-payment crises in 1958 and 1978 ended with military interventions in 1960 and 1980, respectively. The last major crisis, in 2001, resulted in the collapse of the three parties in the coalition and the two parties in the opposition. There is only one case in Turkey’s multi-party political history of the ruling party remaining in power after years of economic depression; it was after just World War II in 1946 and the democratic quality of the elections in question was dubious. A change in the government is thus likely if free and fair elections are held. Alternative scenarios involving social unrest and a financial crash should also be considered, however.
This is a brefi excerpt from Dr Murat Kubilay’s research article “The Turkish Economy under the Presidential System” published by Middle East Institute, link to full article here
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