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So Much Fuss for So Little Debt…

The Entanglement of Economic and Political Crises in Turkey Has a New Dancing Partner: Foreign Policy Shift

Developing countries in emerging markets exhibit different strengths and vulnerabilities in their ways to adopt and react to global financial trends. Some have natural resources, others have cheap labor via a young and vibrant population, while only a few –such as Turkey- can add geopolitical potential into the equation. I intentionally use the term “potential” as it can be a vast resource or a curse for a country such as Turkey.

Turkey’s total national debt (approximately 470 billion US dollars, and 35 percent of the country’s GDP, currently) has been fluctuating between 27.6 and 44 percent of the country’s GDP in the last ten years. When considered in the context of some developed economies, such as Japan (240 percent debt to GDP ratio) and the US (108 percent), or underdeveloped countries, such as Eritrea (128 percent), one would think that Turkish economy would be comfortable in refinancing and expanding its debt with such low levels. It is not, in fact, the entanglement of political and economic crises in the Turkish Republic’s history has always been tied to a debt and liquidity crisis, as I chose to make it the title of this article. The reasons for this vulnerability can be found in the structural problems with the Turkish political and economic systems, as well as in the history of the relatively young republic.

First, a little economic history from Turkey:         

Although the more relevant links for the current economic climate exists after the 1950 “true” multi-party democratic regime “trials”, I will start briefly with the early struggles of a young republic, which is trying to build an independent economy from the ashes and the ruins of an imploded Ottoman Empire. Prior to 1923, which is the declaration of the modern Republic of Turkey as an independent state, the area what we call Turkey today witnessed centuries of wars and the shrinkage of a vast empire into a tiny nation-state. What remained from the ruins of a war-torn region was a devastated population with no middle-class or wealthy entrepreneurs to jump-start an economic model.

Hence, the first 27 years of the young republic, which also coincides with a one-party rule, was dominated by state-owned enterprises trying to start a mixed economic model, in which the state tried to promote a balanced and fair growth of the necessary agricultural and industrial sectors. Naturally, these state-owned economic structures lead to the creation of a state-linked elite class which ruled the country with little opposition, mainly consisting of bureaucrats and military generals. These new elite called themselves “secular progressive” and they declared anyone challenging their ways either “backward” or plain “traitors”. When the country tried to switch to a true multi-party democracy, once in the early 1930’s and one more time in the mid 1940’s, the same elite reacted with not-so-much democratic reflexes which lead to the execution of many conservatives in the country.

Regardless of the arguments for and against the “success” of the early socialist-leaning economic model employed by the one-party rule until the late 1940’s, it was The World War II and the Soviet/communist threat that forced the hands of the same leftist and militaristic elite to approach the democratic Western World. To secure Western help to restore public’s trust in the young state and gain the protection of NATO against a possible Soviet invasion, Turkey had to implement a true multi-party democracy and a real free-market economic system. Economic hardships, famine, poverty, etc. during the 1940’s made the population less sympathetic towards the one-party regime’s policies anyway. And like a coiled spring, the country chose the opposition (a center-right party) at the first true democratic election in 1950. This shift in the foreign policy came with Marshall Plan, and the ability to borrow from the developed world. It also brought a speedy economic expansion, new public projects, a new middle-class, and integration with the developed world… but only initially.

None of these early successes, however, offered any solutions to the inherent structural problems of the Turkish economy, almost all of which still exist today or have some continued implications. At this point, I have to reiterate my earlier argument about Turkey’s remarkable status as a prime example for the link between political and economic problems/challenges. It is a classical “chicken-or-egg-first” story surrounding the never-ending cycle of political instability and economic crises, which makes one wonder which causes the other.

What I would like to underline here is, unfortunately, that the above-mentioned link has root causes in the inherent weaknesses and the structural problems of the Turkish economy. They are mostly invisible to the opposition (mainly left-wing political parties; invisible to them due to their philosophical commitment to socialist-leaning economic rhetoric) and they are unsolvable to the ruling parties (mostly right-wing in the last 65 years; unsolvable due to the fact that the very reasons they gain power only contribute to those problems, i.e. fiscal irresponsibility, debt and corruption).

For a country such as Turkey, which lacks the production and export capacity to meet the financing demands for such expansions, rapid economic growth due solely to major construction projects, which are financed by the public sector, leads to one thing and one thing only: debt; growing and uncontrollable debt. Hence, all of these “trials” to be a democratic and free nation have ended with political/economic crises due to debt insolvency and political unrest, all of which resulted in military coups (1960, 71, 80, 97, 2004, and finally 2016).

I would like to end this section by stating that Turkey is currently facing a new challenge with its traditional political/economic crises loop for the second time in its short history. Its choice and direction in foreign policy is very much part of the equation for where it will find the resources for refinancing its enormous short-term debt (around 260 billion US dollars), half of which it has to refinance every year. It is exactly this unsustainable debt structure and its volatile relationship with the developed world, which makes the country to stand at the crossroads again.

The first time Turkey had to make a choice similar to today’s environment, it choose NATO and the West.

Unfortunately, the country has been spiraling down uncontrollably since the corruption and graft scandals in late 2013, leading to total reversal of reforms in the process of becoming a member of the EU, and eventually another military coup in 2016. In the end, Political Islamism and its populist rhetoric teamed up –unexpectedly- with the political fractions which favor pushing the country away from NATO and closer to Russia-China-Iran pact. I will not attempt to do a political analysis of the last five years for Turkey. Rather, I would like to turn your attention to the economic climate and how it reflects onto the country’s growing debt crisis.

Second, Post-2011 Decline and Challenges

The traditional link I mentioned before about the Turkish experience, i.e. political and economic deterioration of a successful era develop simultaneously, has been the subject of many previous studies in the academic literature. In the AKP (current ruling Islamist party since 2003) case, not only the political climate and the rhetoric were different after the 2011 elections victory, so was the set of macroeconomic realities of the country, both domestically and abroad. AKP was no longer trying to appeal to the diverse group of voters; contrarily it was going back to its Islamist roots. Sectarian and derogatory language was becoming common and expected by party and government officials, only adding to ever-increasing social tensions in the country.

All of this social and political exclusion lead to street demonstrations sparked by peaceful protests against a shopping mall planned to be built on the land of one of the city parks in Istanbul. Government officials ordered state police to respond with the highest level of “legal” brutality, i.e. tear gas, riot police, armored vehicles, etc. 9 demonstrators died, hundreds wounded, but more importantly, the images from previous era government brutality resurrected. Moreover, the Prime Minister didn’t shy away from calling the US ambassador to Turkey “a collaborator with the street thugs” and a “conspirator against his government”.

End of 2013 also marked the beginning of a corruption investigation of many ministers, their children, including -then Prime Minister, now president- Erdogan and his son, some of the businessmen with close ties to AKP. It only lead to replacement and removal of tens of thousands of police personnel and hundreds of judges and prosecutors, and ultimately to an overall change of the entire judicial system of the country. Turkey has been since and still is one of the champions in the world for jailed journalists and censored internet and media. Government officials publicly undermined the health of two banks (BankAsya and Is Bankasi) tied to political descent, completely ignoring the danger of putting the already-weak banking sector into further turmoil. Eventually, BankAsya has been confiscated as many other private enterprises, with “so-called ties to the 2016 coup attempt.

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Moreover, in the aftermath of the first publicly-held presidential elections (used to be elected by the members of the parliament) and June 2015 parliamentary elections, where AKP lost its ability to form a government alone, the country has been sucked into a more destabilizing debate over whether Turkey should have a US-like presidency. PKK (separatist Marxist Kurdish terror organization) regained strength and the southeastern part of the country fell into a war-like situation with hundreds of thousands fleeing the region and becoming refuges in their own country in addition to the 3 million Syrian refugees settling in Turkey.

Turkey has also experienced one of the weirdest “orchestrated” military coup attempts in modern history. Two years after the event, the government still does not have an investigation or a successful conviction of anyone or any particular group, except that President Erdogan and the AKP government were quick to blame the Gulen Movement with lists of tens of thousands of public employees (a little over 170 thousand to this date) fired, 70 thousand jailed  and more than 200 thousand banned form public sector, more than half of the high ranking generals in the armed forces fired, regardless of their affiliation, tens of newspapers and TV stations shutdown, hundreds of journalists and writers jailed… and the list goes on and on… as if this failed coup attempt (July 15, 2016) was “God-sent” by Erdogan’s own words to get rid of descent in every level of the society. Economically, hundreds of businessmen are jailed and their companies as well as their personal property confiscated by the government, an estimated market value of $67 billion, only a drip to temporarily satisfy the country’s need for foreign capital.

The near future presents many unknowns about the –already damaged- checks and balances, as well as a struggle for Turkey to stay loyal to its historic alignment with NATO and EU as AKP is approaching the Russian-Chinese-Iranian political block militarily and economically. Turkey’s 60 year-long bid to become a member of EU is not even pronounced by the AKP officials anymore. What is left form that bid is the negotiation for money in exchange for accepting Syrian refugees back into Turkey from Europe. Moreover, the EU has decided to freeze the accession period with Turkey due to human rights violations in the aftermath of the failed coup attempt. Unfortunately, the status quo only presents a social –as well as economical- reality only comparable to other unstable Middle Eastern countries, or even worse, dictatorships with “one strong man rule”.

The reason I mentioned these political and social changes is only to tie them to the changing economic and business environment, as well as to revisit the point I made earlier about the historical roots of such tension and social trauma.

Third, the “evil” West and “outside powers”:

Populist politics is universally skillful in blaming every failure to some evil outside power, and seek public support to protect the population from these wrong-doers. Turkey’s Islamists are no exception, in fact, they are quite good at it. Rising anti-Americanism, anti-EU sentiment, and anti-Israel rhetoric are very common tools used by the Turkish government to blame every failure in the county onto outsiders, especially in the economic policies.

Traditional demographics which made Turkey a vibrant and young population are changing: the country is getting older, and there is no more room to create real estate wealth through construction projects due to the mass migration from rural areas into the cities. Once a shining star, agriculture, is sounding alarms: to the point that the country is importing both live cattle and feed for the same cattle.

Political turmoil, terror attacks and nearby wars have made tourism only an anemic source of much needed foreign currency supply for the country. Trade with neighbors has been diminishing for the same reasons, as the country has no real friends or partners in the region. Ungrounded foreign policy adventures, such as the one in Syria, has left the entire region in enormous risk of war. Reversal of the reforms in the process of the country’s EU membership bid, not only paralyzed the investment environment, but also scared off the existing capital from the country. Many corporations cannot declare bankruptcy protection, just because there is “emergency rule” and it is illegal to do so. Lack of legal protection for personal and property rights have been worse than many dark pages in the young country’s less than a century old history… so much for a free market economy trying to integrate with the developed world…

Capital markets, of course, are not as adventurist as they used to be in the face of rising interest rates and tightening monetary policies. In addition, the fear of a global slowdown makes the lenders very nervous about countries such as Turkey, even when they pay enormous levels of high interest rates. Moreover, political leaders’ stubborn and populist rhetoric only wins support domestically, but scares away potential lenders globally. As a result, the country’s government debt has been downgraded to “junk” bond status, which eliminates the potential for borrowing from institutional investors in the developed markets. In addition, credit rating agencies have been downgrading Turkish banks as well as large Turkish corporations lately. There is also rumors of economic sanctions against Turkish banks, as well as the Turkish government related to several terror-financing, UN embargo violations and corruption cases. Not surprisingly, all of this is blamed onto the “evil” Western powers who are trying to “sink” the country… and the crowd cheers in Turkish, drifting further from the developed world.

This is the third dimension I intended to add to the classical political/economic crises loophole Turkey has been suffering from: a dangerous shift in foreign policy, because the existing structure can no longer finance its unsustainable operations from the developed world. In addition to the traditional Turkish financing problems, such as Current account deficit, enormous short-term debt etc., this time the country is showing signs of political blackmailing and concessions to questionable alliances due to its financial problems. Hence, one can no longer see the approaching liquidity and economic crises merely as a result of yet another political crisis, or of another economic down cycle. It is rather a structural shift, or even a potential fracture in the heart of the society.


What all of this meant for the investment world and the business environment in Turkey however is a very dark picture:

  • The Central Bank had to almost triple the policy interest rates in recent years to more than 14 percent (compounded) to avoid an all-out liquidity crisis and stop any potential inflationary pressure. Yet, it cannot stop the devaluation of the Turkish Lira (TRY) against the US Dollar and the Euro.
  • Turkish Government had to declare government guarantees for public (construction) projects to subsidize the crony businessmen to get the rentier capitalism going, because they could not secure financing from international outlets without government guarantees.
  • Domestic spending and credit card debt hit a record high.
  • Total debt of the country is out of control; moreover, more than half of the debt stock (260 billion US dollars) is short-term and half of it requires refinancing every year.
  • Government is pressuring Central Bank to lower interest rates to get consumption going and construction projects subsidized.
  • Almost every policy tool of the Central bank has been ridiculed and nullified by the government officials, to the point that they cannot control the value of the currency anymore.
  • Wrong choices in foreign policy lead to isolation of the country, and the neighboring countries all have problems and trade disputes with Turkey.
  • Approximately 3 million Syrian refugees add to the 17% unemployment.
  • 1 out of 5 unemployed people under the age of 35 is a college graduate.
  • 15 million people (20% of the country’s population) rely on direct financial aid from the government.
  • 34 % of the population lives below the government-announced poverty line.
  • Even after the huge drop in value of the currency, exports are decreasing.
  • Hundreds of businessmen are jailed and their private companies as well as their personal property confiscated by the government.
  • Current deficit has been between 5.6 and 7.9% of GDP, much worse than the 2001 era crisis figures.
  • None of the drop in global oil prices reflected in gas prices in Turkey because: first, 73% of the gas prices is taxes and the government cannot give up tax revenue in an election year; second, no matter how much oils prices drop it gets offset by the drop in the value of Turkish Lira.
  • As of September 2016 Turkish government as well as major Turkish banks’ bonds have been down-graded to junk, and the drop has been continuing with no end in sight.

Finally, I will close with the argument in my title, but this time as a series of questions:

  • Who is going to be the highest bidder for the future of this geopolitically important piece of land?
  • Is it going to be the people or the populist Islamists who will determine the direction of the country?
  • Can Turkey afford to be autocratic and anti-democratic, yet be part of NATO and the West, culturally and economically? Or, is it going to go down the unfortunate path of other Middle-eastern dictatorships?

Only questions, for now…

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Elvan Aktas
Elvan Aktas
Dr. Elvan Aktas is a Professor of Finance and Director of Graduate Programs for Langdale College of Bus. Administration at Valdosta State University


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