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In Turkey, the Central Bank continues to act against the tide of its peers: it is due to lower its key rate this Thursday. This policy guided by President Erdogan is producing contrasting effects: inflation is rising dangerously but growth remains robust.
The Governor of the Central Bank, the third man appointed in two years to apply the policy dictated by Recep Erdogan to the letter, should lower its key rate by one and a half points, to 9.5%. Over one year, this rate has been halved. A totally anti-conformist policy to fight against inflation. According to economic theory, – and practice!, it is by raising rates, thus cooling the engine, that we manage to curb inflation. But President Erdogan does not care, he believes that it is the opposite that works. The miracle did not happen: inflation continues to soar; it rose in one year from 20 to 84% according to official figures. Behind this pseudo-belief of President Erdogan, there is above all another economic choice: that of maintaining robust growth at all costs to flatter his electorate, which is partly made up of small business owners. Six months before the presidential election where he hopes to win a third term, the central bank has only one mission: to offer an attractive rate to boost growth.
And for the moment Turkish growth remains sustained
Since January it has exceeded 7%. This good macro-economic performance is reflected in the stock market. It has taken more than 60% in one year, a record that defies understanding compared to other emerging financial centers. Last source of astonishment: the State maintains the confidence of the markets, the bond issued at the beginning of November generated three times more demand than necessary. The State was able to raise 1.5 billion dollars at 10% over a period of eight years.
These flamboyant results contrast with the difficulties endured by Turkish households
The prices of food, housing and transport have almost doubled. This rise in prices is partly fueled by the plunge in the Turkish lira. It lost 30% against the dollar. This increases the bill for vital imports for daily life such as oil or medicines and widens the trade deficit. Unemployment, at 10%, mainly affects the east of the country. On the west facade, employment is doing well. Thanks to tourism from the Gulf countries and Russia, and thanks to the construction sector driven by this macroeconomic upturn.
How to interpret such disparate indicators?
According to critical economists, this race forward is being done on the backs of Turkish citizens. Faced with galloping inflation, they took on heavy debt to compensate for the drop in their purchasing power. On the other hand, public debt remains moderate: it is less than 40% of GDP. This pro-growth policy weakens the foundations of the economy. To avoid the financial crisis that threatens with the fall of foreign exchange reserves, President Erdogan has obtained the support of his allies. China, the United Arab Emirates and especially Qatar, have replenished foreign exchange reserves. Riyadh could in turn deposit $5 billion in Central Bank accounts. (Six years after the assassination in Istanbul of the journalist Jamal Kashoogi this gift would seal Turkey’s reconciliation with Saudi Arabia). Without this external and temporary support, foreign exchange reserves are in deficit. The Turkish economy is therefore based on a precarious and very artificial balance. Its atypical growth should quickly be diluted in 2023. Not sure that Recep Erdogan’s bet will hold until the next election.