Finance & economics | Turkey’s economy

Saved by the well

An ailing economy has staged a partial recovery thanks to cheap oil

|Istanbul

IT IS a measure of how weak Turkey’s opposition parties are that they see an economic crisis as their sole hope of ejecting the conservative Justice and Development (AK) Party government. In the summer of 2013 their dreams seemed within reach: America’s Federal Reserve signalled it would soon start tightening monetary policy. In the ensuing “taper tantrum”, investors pulled money out of emerging markets in the expectation of higher interest rates in America. Turkey is highly dependent on foreign capital (the current-account deficit hit 7.9% of GDP in 2013); disaster seemed imminent.

The sharp rise in interest rates needed to keep the lira from plunging naturally took a toll on the economy. The wilting currency, meanwhile, contributed to rising inflation. A further blow came with the upsurge in violence in neighbouring Iraq and Syria. Turkish exports to Iraq, its second-largest market after Germany, tumbled by 40%. And Turkey’s fraught peace talks with its own Kurds nearly collapsed threatening, in turn, a resumption of a 30-year rebel insurgency. The economic stability that has been the hallmark of the past 12 years of AK party rule seemed at risk.

Then the oil price slumped. That immediately relieved the pressure on the current account and on inflation. Turkey’s huge energy imports had been costing 6% of GDP a year. Thanks largely to lower fuel costs, the current-account deficit is set to shrink to around 5 % of GDP this year. Largely for the same reason, inflation will fall to 6.8%. Most bankers say the economy will grow by around 3.5% this year; the government talks of more than 4%.

Indeed, with other big emerging markets such as Russia and Brazil beset by troubles of their own, investors are giving Turkey another look. “A large volume of funds has started to flow into Turkey,” boasts Mehmet Simsek, the finance minister. The wobbly Kurdish peace talks seem to have been salvaged. AK is likely to win parliamentary elections due in June. Ali Babacan, the respected economy minister, is expected to stay on in some capacity.

“Will Turkey grasp this opportunity to accelerate structural reforms, or opt to stimulate growth ahead of elections?” asks Serhat Gurleyen, of Is Bank, one of Turkey’s biggest. The IMF has similar questions. In a mildly gloomy report released in December, it argues, “Policies should focus on rebalancing the economy, reducing the external deficit—by boosting savings rather than decreasing investment—and lowering inflation to preserve competitiveness.”

The IMF would like to see Turkey liberalise its rigid labour market—one of the reasons the OECD ranks it as among the most over-regulated of its members. Female participation in the labour force is pitifully low at 30%. Even with few women working, the economy needs to keep growing by at least 3.5% to hold unemployment at 10%, reckons Emre Deliveli, a local economist. Around 2m Syrian refugees, an ocean of cheap labour, are adding to the pressure.

Education is another worry. Only 1% of Turkish students have advanced computer skills, compared with 33% of their Polish peers. High-tech gear makes up a measly 2% of manufacturing exports (see chart); R&D spending totals only 0.9% of GDP. Yet Turkey’s Islamist president, Recep Tayyip Erdogan, seems interested chiefly in spreading the faith and reviving Ottoman Turkish influence.

Selin Sayek-Boke, an economist and opposition politician goes further, pointing to Mr Erdogan as an economic risk. The former prime minister has retained his iron grip over the government since being elected to the presidency in August. He keeps nagging the central bank to cut rates in the bizarre belief that high rates stoke inflation.

Mr Erdogan’s campaign to destroy Fethullah Gulen, a popular cleric and one-time ally, is sowing fear in business circles. Bank Asya, a small Islamic finance house that is associated with Mr Gulen, is caught in the crossfire. Government-linked businesses withdrew their deposits, public trading in the bank was suspended three times, and Mr Erdogan went so far as to suggest that Asya was “already bankrupt. “The greatest threat to the economy is the erosion of the rule of law,” says Ms Boke.

Yet Mr Erdogan understands more than anyone that it is rising living standards that help to keep AK in power. He may be persuaded that change is needed. “Some less costly reforms will likely be front-loaded,” predicts Ahmet Akarli of Goldman Sachs. “But the more contentious ones will probably be implemented only after the 2015 general elections.”

This article appeared in the Finance & economics section of the print edition under the headline "Saved by the well"

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