Alwaght- Less than a month to the presidential elections in Turkey, inflation crisis makes the hot debate topic of the campaigns, and six powerful opposition parties have gathered around Recep Tayyip Erdogan’s challenger Kemal Kilicdaroglu to pose the biggest challenge ever to the president. Erdogan, who is preparing himself for win in the May 14 election, is sparing no trick to assure the people that his government will patch things up.
Despite these election promises that are aimed at winning votes, the Turkish economy in recent years has not been feeling well and recorded 80-percent inflation in 2022. Erdogan relatively curbed the impacts of the crisis by some financial moves including pay rise and retirement age decrease, but these moves are all temporary and work like painkillers to motivate the people to vote.
Turkey’s lira is likely to drop sharply and could near 30 to the dollar following next month’s elections, regardless of who will win, bankers at JPMorgan have predicted. Two scenarios can be presented regarding dollar, they said.
In a “strong commitment” scenario they predicted the lira would initially fall to 24-25 to the dollar and to 26 by year end compared to around 19 currently.
Benchmark government bond yields, which drive borrowing costs in the economy, would jump to 25 percent.
“Initially, lira depreciates, driven by pent-up pressures of the large stimulus ahead of the elections. As financial repression is relaxed, locals increase FX portfolios, while foreigners wait for better valuation entry points.”
If the shift towards more orthodox polices looks like being more modest, however, the lira could drop to close to 30 to the dollar by year end albeit with a slower initial drop while bond yields were unlikely to adjust much in this scenario.
“A tactical assessment will therefore be needed and we expect elevated volatility,” JPMorgan’s analysts said.
They cautioned that, even with best intentions, the path to disinflate the economy will be protracted, while it was likely that the central bank would also aim to rebuild its FX reserves.
They added that only a modest return to orthodox macroeconomic policies, including a slower pace of credit growth, some lower levels of financial repression and some path to rebuilding FX reserves, was “unlikely to inspire capital inflows” meaning the lira would “likely remain on a more protracted depreciation path”.
They estimated the lira’s real effective exchange rate (REER), which takes into account prices and measures its value against other currencies whose countries Turkey does a lot of trade with, was now about 32 percent below its “fair value”.
This report about the Turkish economy comes as lira has lost over 80 percent of its value against the dollar in the past 5 years. This happened after Erdogan insisted on decreasing the interest rate for cheaper exports and growing domestic production. But it seems that his plan was not successful. The Turkish lira has lost about 30 percent of its value against the dollar in the past year alone, driven by concerns about monetary policy and the fallout of Ukraine war.
Lira drop cycle
Lira value drop has been pressurizing the Turkish economy, but currency policy-makers struggle to block further slump on the eve of the elections with regulations. Despite this, productivity growth in Turkey slowed down as reforms have slowed down over the past decade, exacerbated by high private sector debt, a persistent current account deficit, high inflation and unemployment due to major financial instability since August 2018.
The Turkish inflation rate is now 51 percent, lower 30 percent compared to October last year. That is what emboldening Erdogan to maneuver on his policies and promise to get things right within a year.
Amid critical economic conditions and inflation, over 50 percent loss of value of lira will make the conditions even worse, and this at a time the country has been grappling in the past months with the aftermaths of the devastating earthquake can put the president in a tight spot. The damage of the magnitude 7.8 earthquake that hit the country in February is estimated around $100 billion, and despite the fact that Erdogan has managed to relatively improve the conditions, given the gloomy economic conditions caused by the earthquake, the public can not be so optimistic about stronger economy.
The ruling Justice and Development Party (AKP) scored a major win in 2003 when it beat the secular hegemony in Turkey that was built in the 1920 by Kemal Ataturk, the founder of modern Turkey. At the time, the economic crisis made the main reason for the AKP victory and when Erdogan assumed the office as prime minister, he began to revive the economy and transform it into a powerhouse putting Turkey among 20 major economies.
Turkey’s GDP grew 7.2 percent on average from 2002 to 2007, supported by the International Monetary Fund and booming conditions in Europe. Many voters, including working-class Muslims, the Asian part of Turkey, and the general middle class, supported Erdogan. Although Erdogan proved successful in economic policies until a few years ago, inflation and the currency crisis have had a negative impact on all sections of Turkish society over the past five years.
Serious damage to lower class
Currently, Turkey is the world’s 19th biggest economy with a GDP of about $906 billion. In recent years, its economy suffered serious damage and the lower class sustained the biggest damage from the high inflation rates. According to data, over 40 percent of Turkish labor force receive a minimum of legal wage, which due to the lira value loss, it was reformed for three times in a year to reach 8,500 lira ($442). For a better understanding of this issue, we can take a look at the people’s purchasing power. The purchasing power of the people has dropped to its lowest level in recent years. Erdogan government’s increase of the salaries of workers and employees by 50 percent at the end of 2022 and the promise to increase it again by 30 percent in recent days indicate that the economic situation of the people is more complicated than what the government declares.
The hunger threshold for a family of four has reached 9,590 liras ($494), while the poverty line has risen to 31,240 liras ($1,624), according to statistics released by the Confederation of Turkish Trade Unions reported in March. Hunger threshold indicates the minimum amount of money needed per month to save a family of four from hunger, while poverty line indicates the amount of money needed by a family of four to have enough and healthy food. It also covers expenses related to basic needs such as clothing, rent, power, water, transportation, education, and health care.
What do experts say?
The economists are against the government view that hopes considerable economic improvement will be within reach until next year. Many economists expect the main interest rate to be reversed in the second half of year. According to Bloomberg, a poll by an American bank suggested that in the third quarter, the interest rate will increase 0/5 percent over the current 8.5 percent. Experts suggest that the problems Turkey is facing will not stop with the defeat of Erdogan in the elections, and the economy will probably sunk in a currency crisis immediately after the elections. If the AKP manages to retain the parliamentary majority, the ability of a post-Erdogan government to deal with inflationary pressures and the economic fallout from years of economic dysfunction could be severely hampered. Victor E. Szabo, the investment director of abrdn, an insurance service company based in London, suggests that the current Turkish monetary policy path is unsustainable, and even though the opposition has a rational plan for the economy, adjusting inflation will be painful, as economic growth will be limited to lower inflation.
Some other experts, however, look positively to the post-election period for the Turkish economy. Economists at UniCredit S. P. A in a report maintained that they expect 50-percent inflation for the Turkish economy at the end of the year, but stricter monetary policies can curb the inflation to around 24 percent in 2024.
Despite hard work by Erdogan, lira has been one of the worst performing currencies among its counterparts in the emerging markets and only in March it lost 2 percent of its value against the dollar. Currently each dollar equals 18.85 lira.
Though Erdogan has made many promises, from pay rises to lower inflation and taxes, in his election campaign, it does not seem he has a smooth path to victory. The economic conditions over the past three years have been poor and people have experienced unprecedented inflation because of lira value slump and lowered interest rates, something Erdogan’s opposition will focus on more in the election campaigns. Perhaps this time the economy becomes Erdogan’s Achilles heel in the elections and he loses his position to the rivals after 20 years of being unchallenged strongman of Turkish politics.
