Since 2002, when Recep Tayyip Erdogan’s AK Party came to power, the Turkish economy has grown in size by more than 60% and political stability has been restored. But now Erdogan is destroying his reputation.
His response to a corruption scandal implicating members of his government has been to sabotage the judicial investigation and insist that it is the work of a political rival.
“Foreign investors are becoming unnerved by the dangerous erosion of the rule of law,” says the FT. Stocks have slid to a two-year low and the Turkish lira is at a record low against the US dollar.
The exodus is especially awkward because Turkey has a huge external, or current account, deficit worth over 7% of GDP. So the economy depends on foreign money to plug the gap.
Some of the foreign capital is in the form of long-term investment in infrastructure or production facilities. But most of it is in the form of stock or bond investments – shorter-term investments known as hot money.
Hot money can turn cold quickly when investors flee, as is now the case. The “economy is vulnerable to the slightest perception of political risk”.
There is now “a sense that things are sliding out of control”, says The Economist. Erdogan is refusing to let the central bank raise interest rates to steady the lira and cap inflation of nearly 8%. Pricier money would hurt the struggling economy.
But with the plunging currency stoking inflation, the greater the delay, the more international confidence is likely to be lost and the nastier the downturn once rates are finally raised. Stocks and the lira remain a sell.