July 21, 2013 / 1:07 PM / 5 years ago

Analysis: Erdogan puts Turkish policymakers in dilemma

ISTANBUL (Reuters) - With a powerful prime minister bent on pumping up growth ahead of elections but a sliding currency and rising borrowing costs, Turkish policymakers are caught between a rock and a hard place.

Turkey's Prime Minister Tayyip Erdogan addresses members of parliament from his ruling AK Party (AKP) during a meeting at the Turkish parliament in Ankara June 25, 2013. REUTERS/Umit Bektas

Rattled by weeks of anti-government protests and with a peace initiative for Kurdish militants looking increasingly fragile, the last thing Prime Minister Tayyip Erdogan needs with an election cycle starting next year is an economic slowdown.

His rhetoric has become increasingly populist in recent weeks, vowing to “choke” speculators who he said were growing rich off “the sweat of the people”, and blaming a “high interest rate lobby” for seeking to undermine Turkey’s growth prospects.

Such words from a leader who has transformed the economy over the past decade, overseeing some of Europe’s fastest growth and a near tripling of Turks’ nominal wealth, has unnerved investors who have long bought in to the Turkey rising story.

“The Turkey narrative has certainly suffered,” said Christian Keller, a former IMF representative in Turkey and now a senior economist at Barclays Capital in London.

Erdogan and the ruling AK Party he founded have built their reputation on Turkey’s economic transformation, winning three successive parliamentary elections over the past decade as a burgeoning middle class grew richer.

But his determination to maintain that record has laid bare a rift between fellow populists such as Economy Minister Zafar Caglayan, a vocal critic of the central bank, and more moderate and voices such as Deputy Prime Minister Ali Babacan, viewed as a steadier hand trusted by the markets.

Erdogan’s appointment of columnist and TV commentator Yigit Bulut, who last month suggested the prime minister’s enemies were seeking to kill him by telekinesis, as his chief economic adviser, as well as probes into recent stock market transactions and currency trades, have done little to calm nerves.

“Turkey is a plane which has only reached the start of the runway ... Now it is time for the plane to take off,” Bulut wrote in a newspaper column this week, saying the economy needed to be tripled in size over the next decade.

It faces strong headwinds.

Concern about the U.S. Federal Reserve’s planned withdrawal of monetary stimulus, combined with Turkey’s domestic unrest, sent the lira tumbling to its weakest ever this month and are doing little to support growth prospects.

Babacan acknowledged on Wednesday that any downward revision to the government’s 4.0 percent growth forecast this year should come as “no surprise”.


Erdogan’s disdain for bankers - this week he targeted lenders charging exorbitant credit card fees - may be partly playing to the gallery, but it is rooted in firmly-held beliefs.

The son of a poor sea captain from the Black Sea, he was hardened by a childhood in Istanbul’s Kasimpasa, a tough district of newly arrived migrants from the countryside.

As a boy, he sold lemonade and bread rolls to help the family pay for a religious school, a background biographers say instilled in him Islamic piety, business pragmatism and a respect for hard graft.

His distrust of Istanbul’s Western-facing financial elite may play well in Turkey’s conservative Anatolian heartland, the bedrock of AK Party support, but it is viewed with growing concern elsewhere.

“Although Erdogan has a lot to gain from this language for domestic political purposes, taking concrete action is actually counterproductive for the country’s economy which is desperate for external funding to finance its still-large current account deficit,” said Naz Masraff, Europe analyst at Eurasia Group.

“The concern is that Erdogan is now surrounded by people like Bulut, and those that represent more mainstream views, such as Babacan, are very much sidelined.”

Babacan has been a key figure in the cabinet since the AK Party came to power, overseeing the economy for all but a brief period when he served as foreign minister, and winning a reputation for prudent policy in the years after a 2001 crisis.

But he is serving his last term under party rules and there are questions over how strongly he will be able to defend the case for price stability and fiscal prudence as the polls loom.

Who succeeds him will be telling.

Erdogan keeps a tight control of government and ministers who do not have his ear find themselves sidelined.

He has been at odds with Babacan before, notably in 2011 when Erdogan rejected a fiscal rule plan aimed at enforcing cuts in spending which investors would have taken as a guarantee of budgetary discipline.

“Erdogan has been determining economic priorities and insists on their enforcement. When things get problematic then Babacan intervenes to fix the situation,” said Ugur Gurses, Radikal newspaper columnist and a former central banker.

“He is the ‘emergency person on call’ ... Other economy-oriented ministers are following Erdogan’s lead, not Babacan’s. And this is creating mixed messages.”


The central bank has been caught in the crossfire, spending $6.5 billion so far this year in forex sales trying to support a sliding lira without raising rates, while also trying to keep inflation down and prevent the current account deficit, running at around 7.1 pct of GDP, from widening further.

Central Bank Governor Erdem Basci, a contemporary and school friend of Babacan’s, hinted on Monday that a rate hike would be on the agenda next week.

His rare announcement in the run-up to a monetary policy meeting came a day after Erdogan met with Babacan, Finance Minister Mehmet Simsek and other economy officials, leaving some with the impression that he had been emboldened to act after receiving the government’s blessing.

“The (government’s) desire to pump prime growth is likely to be very high,” said Timothy Ash, head of emerging market research at Standard Bank.

“The central bank will struggle to fight against this, and the weekend’s policy meeting ... was hardly re-assuring in this respect, with the central bank appearing almost as having to get the sign off from the government to move to tighten.”

Both government and central bank officials reject the notion that the central bank is anything other than independent, and say that divergent views within government can only be healthy.

“It listens to all views, it studies all analyses, it conducts its own analyses, but when it comes to reaching decisions, the monetary policy committee meets and does whatever is right,” Babacan told a news conference on Friday.

He declined to comment on the details of Sunday’s meeting.

Investors will be watching Tuesday’s rate decision to see just how bold the central bank is prepared to be.

With Turkey’s two-year benchmark bond yielding just below 9 percent, many argue only a rise of several hundred basis points in the overnight lending rate will have any impact, but most economists in a Reuters poll forecast a rise of just 50-100 bps.

Additional reporting by Daren Butler. Editing by Mike Peacock

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