Turkey Q&A
Herein find below a quick update to my views on Turkey, presented in a Q&A as much for my own ease in writing, as for the reader.
Q? Is Simsek here to stay?
Answer - Yes, and knowing what the hidden question herein is, I don’t think this is going to be a repeat of the Agbal situation.
The market does fear another economic policy 180, for sure, in a repeat of what happened to former CBRT governor Agbal. But I think things are different this time.
What is not different are Erdogan’s views on interest rates. He still views them thru an Islamic faith based prism. He deplores usury. And low interest rates have politically served him well - delivering growth and securing him many an election.
I think though Erdogan’s views have been tamed somewhat by a combination of factors:
First, I think there has been a near complete clear out of Erdogan’s economic policy advisers, partly reflecting the rise of the Teknocrats within the family/team. Erdogan trusts this cadre as they helped him deliver a very difficult election in 2023, and have brought him big geopolitical wins, for example in NK. They are rational and orthodox and have supported the promotion of the technocrats like Simsek, Erkan, Akcay, Karahan H&E to the key economic policy portfolios.
Agbal never had this level of backing from within the palace.
Second, the shear scale of the problems that faced Turkey, in the aftermath of the 2023 elections, and because of the past decade of unorthodox policies was such that there simply was no alternative but to move back onto an orthodox economic policy tack. If policy had not changed in the aftermath of the May 2023 elections, Turkey would have faced a systemic economic crisis to rival that in 2001/2. I think that was crystal clear to all rational economic thinkers, and the message I think was overwhelmingly related to Erdogan. He listened, understood and accepted the need for change.
Third, the policy is working, as reflected in the stabilisation of Turkish markets now, with Turkish credit risk moderating (CDS tighter by 400bps from the 2023 peaks), the lira relatively stable (or at least depreciating at a more modest pace), while the CBRT has been able to accumulate close to $40 billion in additional FX reserves.
Fourth, Erdogan has gone to the Gulf for money, for a financial bailout, and I think Gulf states, be that Qatar, UAE or Saudi Arabia have sent the same message - yes, we are willing to provide tens of billions in investment to Turkey, but we want our money paid back with a return, and to ensure that we demand orthodox economic policies.
Interestingly, I was asked last week whether Gulf money could be a substitute for Western capital flows and in a way could be a moral hazard play of allowing Erdogan to go off the rails and revert back to orthodoxy. My answer for the above reasons is absolutely not. And, interestingly Gulf money as yet has been slow to be disbursed to Turkey - the capital flows that are coming are from international capital markets. The Gulf guys seem to be using conditionality - demanding orthodox policy - as the price for their investment. I think this actually plays to the advantage of Simsek et al, as they can go back to Erdogan and explain that the Gulf money will only come if Simsek is allowed to deliver policy orthodoxy.
Q? What is your economic outlook for Turkey now?
Answer - there is now light at the end of the tunnel, even though I think the fight against inflation will be tough, and take time.
But a year ago, without the policy 180 to orthodoxy we have seen, I did expect a systemic economic crisis in Turkey - BOP, banking and sovereign debt. That was the approaching train, which I think has been put in the sidings, hopefully permanently.
Inflation is though entrenched. Expectations are for it to continue rising through to May/June this year, but then with base effects it should begin to moderate to perhaps 35-40% at end of 2024, and possibly to something with a 20% handle the year after. The CBRT policy tightening of over 3000bps now will have an affect, as will tighter fiscal policy. On the latter note that while the expectation for 2023 had been because of elections and earthquake spending the budget deficit would have been 9% of GDP, but as was it was nearer to 5-6%. That was a remarkable achievement, under the circumstances. But given pre local election spending, and the above expectations minimum wage hike this year to 49%, the CBRT’s job has been made harder. I expect policy rates will have to be increased further now, to 45-50%, and held higher for longer, if the 5% inflation target is to be hit anytime soon. I think Simsek, Erkan et al are committed therein. I expect policy to be tightened after local elections - albeit admit therein some nervousness about talk of a potential constitutional referendum which would create another election cycle.
Q? What about local elections?
Answer - hard call but given opposition disarray still, I think the ruling AKP-MHP coalition looks set to do well, winning back a host of municipalities, perhaps even Istanbul - albeit Yavas’s hold on Ankara looks too tight. A strong showing by the ruling AKP-MHP should then play well for the maintenance of policy orthodoxy by Simsek et al - albeit as noted above, constitutional referendum not willing.
Q? Do you worry that Erdogan’s vocal support for Gaza, and criticism of Israel, risks Western sanction on Turkey?
Answer - no, not really. Erdogan is just saying what the whole of the Arab and Muslim world thinks - Western double standards again being rolled out in the Israel - Hamas war. And it’s Erdogan’s MO. He does it, because he can, because he thinks he still has leverage over the West across a range of areas, such as migrants, regional security issues (Russia - Ukraine war, NK, Syria, etc al), and more recently with Sweden’s NATO bid still dependent on a Turkish green light. The US/West might not like Erdogan, and might have preferred for the opposition to have won in last year’s election, but Erdogan did win that election, and is in power for the foreseeable future in Turkey. He has to be worked with on too many issues, and if this means allowing Erdogan to voice his unfiltered views on Israel et al, then the West can really do little about it.
Q? Do you expect Turkey will finally sign off on Sweden’s NATO bid?
Answer - yes, and likely sooner, rather than later. Erdogan has extracted whatever leverage he probably could by delaying signing off on the bid. Turkey has secured concessions from Sweden over the Kurdish issue, and as noted above, by holding the Sweden NATO bid in his grace, it has given Erdogan a free verbal hit against Israel on Gaza. But delaying approval much longer could seriously damage longer term U.S. - Turkey relations. Turkey wants F16 upgrades agreed as part of the quid pro quo, and there appears to have been progress therein in the US. Note also that with Germany green lighting Eurofighter sales to Saudia Arabia, there is not much now standing in the way of it lifting its veto on sales therein to Turkey. So if the US wants to sell its F16s, and not open the way for the Europeans to seal a deal with Turkey on the Eurofighter, then the US needs to pull its finger out on F16s, which would then allow for Turkey’s Parliament finally to sign off on Sweden’s NATO bid.
Q? Is Erdogan too close to Putin, and is there a risk therein of Western sanctions on Turkey as a result?
Answer - well Erdogan is closer to Putin than the West would like but I see a low probability of Western sanctions on the Turkish state.
It’s complicated in terms of Turkey - Russia relations. Probably the best explanation of Erdogan - Putin relations is the line that Turkey is keeping is friends close but its enemies closer. Erdogan and Putin have a “special” relationship which is complex. Turkey inevitably sees Russia as a regional rival, and threat - in Syria, Azaerbaijan-Armenia (NK) and across the Black Sea. There is no way that Turkey would want to see Russia victorious in Ukraine, as that would see Russia’s domination of the north and east of the Black Sea enhanced, and therein the threat to Turkey. A Russian victory in Ukraine would also see a resurgent Russia push back Turkish influence in Central Asia and Transcaucasia - where Turkish influence has itself been resurgent in recent years and particularly given Russia’s own difficulties in Ukraine. This explains Turkish military support for Ukraine, drones, ordinance and much more behind the scenes.
But Turkey needs to keep the peace with Russia (it’s a Black Sea littoral neighbour) - hence it has avoided joining Westerns sanctions on Russia - much to the annoyance of the West. It has also sought to leverage its economic ties with Russia for its own economic advantage - running a very delicate balancing act to keep the right side of Western sanctions (just). Turkey certainly saw economic opportunity herein - it’s been a conduit for capital outflows and tourism out of Russia, and technology and manufacturing in. And Putin has rewarded Erdogan and Turkey for maintaining a balanced relationship by continuing to provide cheap energy for Turkey and financing indeed for the construction of a Russian built nuclear power station in Turkey. And this came just at the right time for the Erdogan administration as it faced difficult elections in 2023 and an equally difficult external financing situation with a large current account deficit, large external financing requirement and a shortage of FX reserves. Russian trade, capital, and financing certainly helped the Erdogan administration navigate through a difficult election cycle.
But this is an eyes wide open relationship.
There is also personal chemistry, respect even, between Erdogan and Putin. Perhaps this reflects Putin’s move to quickly come out in support of Erdogan in the midst of the 2016 coup attempt. This was well ahead of Western “allies”, with the exception of us Brits. Notable therein that the glacial speed of the US response, left many in Turkey, perhaps even Erdogan, minded to think that the US was supportive, even behind the 2016 attempt. Suspicions therein remain which is perhaps also why Erdogan is keen not to burn his bridges with Putin, and not put all his eggs in the very rickety Western basket. Rather he has sought to balance, even play off, Russia against the West, and this has worked very well for both him and Turkey.
And for me the key test really was the 2023 elections, and the fact that when I asked Ukrainian friends, in and out of government, who they preferred to win in the 2023 Turkish elections, nearly across the board, they opted for Erdogan, because he had delivered key military support, particularly the Bayraktar drones. And in where Turkey sits Ukraine versus Russia, the latter says it all in my mind. Perhaps that special Erdogan - Putin relationship allows Erdogan to get away with supplying so much military kit to Ukraine, counterbalanced perhaps by the maintenance of the economic relationship with Russia - which is a key lifeline for Putin. And for Putin perhaps he is content not to rock the boat with Turkey, mindful that at least with the status quo, Turkey is far from a slavish ally of NATO, but runs a much more independent line from NATO on so many issues, which gives at least a signal of division within NATO - seen perhaps now on the Swedish NATO approval tryst. Turkey supplying military kit to Ukraine hurts Russia, but the win for Putin is Erdogan keeping Turkey on the fringes of NATO, stalling Sweden’s NATO bid and providing a conduit/get around for economic relations/Western sanctions. Putin gives Erdogan leverage/options and vice a versa.