Investors and economists looking for a precedent as Greece tries to emerge healthier from its crisis often cite Turkey. Since 2003, under the stewardship of Prime Minister Recep Tayyip Erdoğan, Turkey has conquered inflation, cut debt, reignited industry, strengthened its banks, and paid off its obligations to the International Monetary Fund. Erdoğan has stabilized politics, too: When Turkey’s top four generals quit on July 30 amid a dispute with the government—the kind of domestic row that sent Turkish stocks and bonds plunging in the past—the markets barely reacted.
Yet Erdoğan, whose party won its third consecutive national election in June, is suddenly facing his toughest economic challenge since assuming office, and Greece’s crisis may make things worse. Although Turkey’s economy expanded 11 percent in the first quarter, that growth hasn’t prevented the Turkish lira from sliding more than 9 percent against the dollar, the biggest loser among emerging-market currencies.
Demand for imports is widening Turkey’s trade deficit as investors, spooked by Greece, have backed away from stocks and bonds in emerging markets. “There will be global risk, and of course Turkey will suffer” if Greece continues to slide, says Lutz Roehmeyer, who helps manage about $17 billion at Landesbank Berlin Investment and is advising clients to sell Turkish bonds. “When the fear trade starts, they sell big and liquid currencies first, and that’s usually the Polish zloty and the lira.” While the cheaper lira should eventually narrow the trade deficit, it’s also likely to drive up inflation.
Turkey’s economy has grown more than 5 percent a year under Erdoğan, who sold state assets, built roads and railways, and boosted trade with the Middle East. What he didn’t do was cut Turkey’s import bill to make growth less dependent on foreign funds. Turks still don’t save enough to generate the capital the economy needs. The government has not used all its tools to boost labor productivity, such as improving vocational training and making it easier for companies to hire and fire, says analyst Sarp Kalkan of Tepav, an Ankara research group that monitors the budget. If the economy were more productive, companies could finance more of their own growth and lower their dependence on foreign goods and investment. Instead, Turkey’s trade deficit widened to $10.7 billion in June, up from $5.4 billion a year earlier.
Finance Minister Mehmet Simsek promised on July 15 a “more interventionist” industrial policy. The country can shave at least $10 billion from the current-account gap by making car parts locally and using domestic scrap steel, Trade Minister Zafer Caglayan said on July 12. That’s when he announced domestic manufacturing incentives for six industries that account for at least $30 billion a year in imports. Turkey’s financial authorities are trying to rein in the credit boom that’s spurring imports. The central bank, while keeping interest rates at a record low, has ramped up reserve requirements for commercial banks. Lending is still growing at nearly 40 percent a year, far above the government target of 25 percent.
Turkey has painful experience with busts, such as the lira slumps of 1994 and 2001 that ended boom periods and triggered big contractions. Such setbacks have kept Turkey’s long-run growth below that of some other emerging markets. Since 1980, South Korea’s output has jumped about sevenfold, while Turkey grew less than half that much, according to IMF data.
Erdoğan says his government has ended the era of crises. “Turkey’s global standing is now very different,” he said at a May 5 rally. Billboards during the campaign proclaimed his party’s slogan: “Lasting stability, continued growth.”
For continued growth, the precedents aren’t favorable, says Cern Akyurek, an economist at Deutsche Bank in Istanbul. “An orderly adjustment is not something we have seen in the past,” he says. It will require tighter budgets, higher interest rates, and an acceptance of slower growth, “not to mention some luck.”