They may now regret it. In dollar terms, those who followed Mr Erdogan’s advice 18 months ago have lost a quarter of their cash. But the collapse of the lira, which has lost a third of its value against the dollar since the start of emergency rule in July 2016, pushing inflation into double digits, has spared few people in Turkey. Ordinary folk have seen their spending power collapse. Turkish companies groan under the weight of foreign debt amounting to some $300bn, more than a third of GDP. According to Bloomberg, some of the country’s biggest corporate borrowers are trying to restructure loans totalling almost $20bn. Citing a decline in investor confidence, Moody’s, a ratings agency, recently downgraded the ratings of 17 Turkish banks.
Mr Erdogan bears much of the blame. Over the past few years he has favouredcheap credit and high growth over inflation. In May, after he announced he would exercise more control over the central bank in the years to come and proclaimed, bizarrely, that high interest rates cause inflation, the lira went into free fall. It recovered only after he allowed the bank to make two big rate increases, of 300 and 125 basis points, in two weeks.
The problem with Turkey’s economy goes well beyond bank rates. “One fundamental question is the loss of confidence in the functioning of the economic system and monetary policy,” says Seyfettin Gursel, the head of Betam, a think-tank. The other is what may be in store for Turkey’s stability and its reeling democracy after snap presidential and parliamentary elections on June 24th. Outside investors have already been spooked by constitutional changes that will give the president huge new powers after the vote, abolishing the post of prime minister, politicising the judiciary and curbing parliamentary oversight. Rumours that Mr Erdogan might call another election if voters entrust him with the presidency but hand control of the parliament to the opposition have rattled nerves further. Pollsters expect Mr Erdogan to keep his job, but predict a much tighter race in the parliamentary contest.
As always, ministers have promised reforms, a return to central-bank independence and fiscal discipline as soon as the elections are over. But with the exception of the recent rate increases, the signals from Ankara have hardly been reassuring. In the past two months Mr Erdogan’s government has gone on a spending spree to woo voters, offering cash bonuses of over $400 per year to each of the country’s 12m pensioners, tax breaks for new property-buyers and an amnesty for money, gold and other assets brought in from abroad. The president is once again blaming foreign countries for the decline of the lira and exhorting Turks to get rid of their hard currency. “My brothers who have dollars or euros under your pillows, go and change your money to lira,” he said at a recent rally. “We will spoil this plot together.”
On paper, the economy has been booming. In the first quarter, according to data released this week, GDP grew by 7.4% year on year, the same pace as in the whole of 2017. But the government-induced credit binge that has yielded such juicy numbers over the past couple of years is giving way to a hangover. The current-account deficit has widened to $5.4bn in April (over 6% of GDP when annualised), up from $3.7bn a year earlier, increasing Turkey’s reliance on volatile portfolio inflows. Foreign direct investment has steadily decreased since 2015. With credit running dry and companies sitting on a mountain of debt, a sharp slowdown is inevitable, says Zumrut Imamoglu, chief economist at TUSIAD, a business lobby.
But are they bothered?
In Konya, home to the mausoleum of the 13th-century Persian mystic and poet Jalaluddin Rumi, the signs of a downturn and a currency crisis are increasingly clear to the poet’s followers, known as the whirling dervishes, and to generations of hardworking, devout businessmen. A construction boom that began years ago has stopped because of lack of demand, says Saban Topal, a local developer. Prices of cement, iron and other building materials, all of them linked to energy imports denominated in dollars, have rocketed. Last year, Mr Topal paid a contractor 135,000 liras to install a piping system in one of his buildings. This year, he says, the same contractor demanded 240,000 liras for the same job. Local farmers wring their hands about similar increases in the price of fertiliser and petrol.
The conventional view is that the economy, which has more than doubled in size since the ruling party came to power in 2002, has been the key to Mr Erdogan’s and AK’s fortunes. That may no longer be true. Most Turks say the economy is their biggest concern in the elections, but there is little to suggest that AK voters in Konya or elsewhere will vote for the opposition. There is evidence instead that government propaganda, funnelled through media beholden to Mr Erdogan and his cronies, has had its desired effect. According to one study, a mere 4% of AK voters blame the lira’s decline on government policies; 65% believe it is “an operation against Turkey by foreign powers”. At the equestrian club outside town where customers once received free horse rides for selling their dollars, Fahrettin, a university librarian, complains about the increasing prices of foreign science textbooks. “This is a plot,” he says, referring to the weakening lira. “They are trying to topple Erdogan, and to provoke a crisis in Turkey. But they will not succeed.”