Turkish lira has plunged in value by 20% this year, creating unwanted price rises for households and businesses alike.
If you fly from London to Delhi in the future, you might find yourself changing planes at the world’s busiest airport. No, I’m not talking about Dubai International Airport, but Istanbul’s new airport, currently under construction. You might, in fact, do this as early as Turkey’s Republic Day on 29 October this year, when Phase 1 of the new airport opens, but the full project is not due for completion until 2028. Then there will be three terminals, six runways and an annual capacity of 200 million passengers, serving 350 destinations around the world. Many are questioning why so much money is being poured into this, painting the image of a vanity project by President Erdogan.
Istanbul airport is not the only example of such a project. When campaigning for re-election last month, Erdogan announced plans for a new 28-mile canal from Karaburan, close to the new airport, to Kucukcekmeca, linking the Black Sea to the Sea of Marmara. Critics are vehement that this is a “crazy idea”, which will destroy the lives of up to a million people who will have to be re-homed as a result. Erdogan, however, is unrepentant. “Suez is the biggest source of revenue for Egypt”, he claimed during the election run-up, “God willing, the Istanbul Canal will be another fresh breath for our city”.
It’s now a month since Recep Tayyip Erdogan scored a big victory in the polls. The turnout was high, about 88%, and it was judged generally a free election. However, the Organisation for Security and Cooperation in Europe (OSCE) reported that Erdogan had enjoyed excessive media coverage (his opponents had been given less than 10% of the airtime devoted to him), had misused state resources and used the state of emergency to restrict the freedoms of assembly and expression. Although the latter came to an end last Wednesday, it is claimed that more than 120,000 people from all walks of life had been detained or dismissed from their jobs. This included more than 120 journalists, jailed for being critical of the President.
The wily Erdogan will not lose any sleep over an adverse OSCE report as he is well ensconced in his new role as Executive President for the next five years. He will also be untroubled by Turkish Parliament, as his Justice and Development Party, together with his hard-line ally, National Movement Party, holds 344 seats, a comfortable majority in the 600-seat Assembly. Under the new Constitution, he will be allowed three five-year terms, so in theory President Erdogan could rule until 2034, when he will be 79. During this time he has complete control of the executive, including the power to issue decrees, appoint his own Cabinet, draw up a budget, dissolve Parliament by calling early elections and stuff the bureaucracy and courts with his own political appointees. President Donald Trump would relish such powers.
The New Turkey, described by President Erdogan, is a synthesis of Islamic nationalism and Ottoman nostalgia. He has a long standing obsession with Turkey’s Ottoman past and has created thousands of new, some huge, mosques around the country. Some question whether this massive and expensive building programme marks Erdogan’s priorities as Islamic and Ottoman, or simply as capitalist and authoritarian. Whatever the answer, the infrastructure programme is hugely expensive, and herein lies the weakness of his position; the Turkish economy.
The Turkish economy expanded by 7.4% last year, one of the fastest growing on the planet. Erdogan seems unperturbed that this relentless economic growth is coupled with unrestrained borrowing, which has lifted debt levels to alarming heights. He even blames the high interest rate of 17.75% as contributing to inflation, which rose to 15.39% year-on-year in June. Some liken this argument to accusing chemotherapy of causing cancer.
The Turkish lira has plunged in value by 20% this year, creating unwanted price rises for households and businesses alike. The airport and canal projects are estimated to cost $25 billion and if they fail to produce the hoped-for revenue, the public will end up paying the bill. Turkish companies are struggling to meet their debt repayments, having borrowed in foreign currencies and their revenues arriving in devalued liras. At the end of June this year, Turkish private sector companies alone owed more than $245 billion in foreign debt. This is a huge percentage of Turkey’s GDP, which in 2016 was $858 billion.
Economists are detecting a currency and debt crisis brewing in Turkey, as the US Federal Reserve continues to normalise interest rates. Because of this the IMF has been ratcheting up its warnings that Turkey might find itself squeezed for fiscal space any time soon. Erdogan, having unashamedly handed the job of economic chief to his son-in-law, appears oblivious to this danger with some Turkish economists claiming that he is encouraging companies to borrow more. This could cause an upward spiral of inflation and a downward spiral of the value of the lira; not a happy combination. Last week the rating agency Fitch downgraded its rating on Turkey from BB+ to BB, not far from junk.
There are already signs that investors are pulling out of Turkey as the US raises interest rates and the lira plunges. Some economists are suggesting that the Turkish economy could implode, having all the ingredients of a failed state.
How ironic it would be for a politically secure President Erdogan to fall because of his insistence, some say stubbornness, on his damaging financial stewardship.
John Dobson worked in UK Prime Minister John Major’s Office between 1995 and 1998 and is presently Chairman of the Plymouth University of the Third Age.