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Erdoğan faults US for frail economy: good politics, but risky policy

Why We Wrote This

Turkey's economic malaise, a product of mismanagement, could worsen if investors continue to see political leaders subscribe to conspiracy theories rather than take responsibility.

Lefteris Pitarakis/AP
A general view of Istanbul's financial and commercial Levent district, where many of Turkey's leading banks and companies have their headquarters, Thursday, Aug. 16, 2018. Turkey's finance chief has tried to reassure international investors, pledging to fix the economic troubles that have seen the country spiral into a currency crisis.

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Listen to President Recep Tayyip Erdoğan, and Turkey is facing an “economic war” waged by outsiders jealous of the nation’s progress. The lira has lost 40 percent of its value, building projects are out of money, and Turkish companies are burdened by hundreds of billions of dollars in debt. Yet analysts say Mr. Erdoğan is using a diplomatic feud with the United States – a dispute over a detained evangelical pastor held on dubious terrorism charges – to deflect blame for what is a homegrown economic crisis. President Trump, who has called the pastor an “innocent man of faith,” said Aug. 10 he would double tariffs on Turkish steel and aluminum. “US sanctions give the markets the message that it is not a good time to invest in Turkey right now,” says analyst Soner Çağaptay, “at a time when Turkey’s economy is already fragile.” Erdoğan’s narrative of blaming outsiders could make a “hard landing” for the economy all the more likely. “To regain the confidence of the financial markets, Turkey has to explain that it understands the core problem that it faces,” says Sinan Ülgen, an analyst in Istanbul. “The window for a soft landing has not totally disappeared, but it is closing down.”

Deniz, a retired Turkish-American engineer making a family visit to Istanbul, was discussing Turkey’s plunging lira and crisis-hit economy with a hotel receptionist when the hotel manager interrupted loudly.

“Tell Trump it’s his fault!” the hotel manager exclaimed, echoing the official narrative that outside enemies are to blame.

The lira has plummeted in value as testy US-Turkey relations have experienced new lows over the fate of an American pastor detained in Turkey, resulting in increased trade tariffs imposed by President Trump.

But analysts say Turkish President Recep Tayyip Erdoğan is skillfully using the crisis and Mr. Trump’s harsh words to deflect blame for what is essentially a homegrown economic crisis.

Turkey’s deep economic malaise and flailing currency are long-standing and largely due to mismanagement by Mr. Erdoğan and his ruling Justice and Development Party. But they are exacerbated now by a two-week surge in tension and hostile rhetoric between Trump and Erdoğan, two leaders with authoritarian styles.

In Erdoğan’s parlance, Turkey is facing an “economic war” waged by outsiders jealous of the nation’s progress.

That narrative, analysts say, is making a “hard landing” – and a painful recession – all the more likely by undermining confidence that Turkey’s leadership recognizes its own economic problems and the need for managed austerity, rather than subscribing to political conspiracy theories.

And yet even as Trump vowed Monday to make “no concessions” over his demand for the release of evangelical pastor Andrew Brunson – held for 21 months on dubious terrorism charges, after living for two decades in Turkey – some see signs that both Trump and Erdoğan are still leaving room to eventually make peace.

“Sanctions by the US are helping Erdoğan frame the economic meltdown so that it’s not seen as his fault, but as a direct result of economic sanctions,” says Soner Çağaptay, head of the Turkey Research Program at the Washington Institute for Near East Policy (WINEP).

“Turkey’s strategy at this moment is not to escalate [the conflict with the US], but also not to de-escalate – they’re not in a rush,” says Mr. Çağaptay, author of “The New Sultan: Erdoğan and the Crisis of Modern Turkey.”

“Although I don’t think Erdoğan wants a crisis with the US,” he says, “once he’s in it, he also knows he has an economic crisis, and so maybe he is making the best use of it, until the moment comes for a reset with the United States.”

'Not a good time to invest'

Anticipation of an unpopular but inevitable economic slowdown, after years of growth-at-all-costs policies fueled by easy credit and vast government infrastructure projects, is widely seen as the reason Erdoğan chose to call early presidential elections, pushing forward to last June a landmark vote originally slated for November 2019.

Erdoğan won reelection with a 52.6 percent majority and assumed new, near-unassailable powers that had been narrowly approved in a 2017 referendum.

Yet so far this year the Turkish lira has lost 40 percent of its value against the dollar, building projects have run out of money, and Erdoğan has refused to let the central bank raise interest rates to curb runaway inflation, as he rails against an “interest rate trap” by imperialist powers. Turkish companies are burdened by hundreds of billions of dollars in debt.

Adding to Turkey’s woes is fallout over the Brunson case, the latest episode in years of deteriorating relations between the two NATO allies. In July, Trump called Mr. Brunson an “innocent man of faith” who should be released immediately. On August 10, Trump said he would double tariffs on steel and aluminum, tweeting that the steel tariff would hit 50 percent and that US-Turkey relations “are not good at this time.”

Erdoğan responded by slapping new duties on American goods, including a 140 percent tariff on US alcohol, 120 percent on vehicles and 60 percent on tobacco – and blaming outsiders.

“US sanctions give the markets the message that it is not a good time to invest in Turkey right now,” Çağaptay says. “They are compounding the impact of the negative downturn in the economy, almost geometrically compounding it, because they come at a time when Turkey’s economy is already fragile.”

Smartly managed cool-down needed

Sinan Ülgen, chair of the Center for Economics and Foreign Policy Studies (EDAM), an Istanbul-based think tank, says that what Turkey needs now “is a period of cool-down, which needs to be smartly managed by the government, if we want to end up in a soft-landing scenario.”

“The alternative is a hard landing, which means a deeper contraction and more costly outcome,” says Mr. Ülgen, adding that he has “not yet” seen signs that officials are taking the correct steps.

“To regain the confidence of the financial markets, Turkey has to explain that it understands the core problem that it faces, as opposed to the current rhetoric that everything is fine, and this is just an attack by foreigners,” says Ülgen. “The window for a soft landing has not totally disappeared, but it is closing down.”

Rhetoric has been fierce on both sides, with no apparent end in sight. A Turkish court last week rejected the latest appeal for the release of Brunson, who was among tens of thousands of Turks arrested in waves after a failed July 2016 coup aimed at deposing Erdoğan.

Underscoring the tension, gunfire was aimed at the US Embassy in Ankara Monday. No one was hurt in the incident; two men were later detained.

“We will not surrender to those who call us a strategic partner and make us a strategic target,” Erdoğan said this week.

“They have dollars, we have our Allah [God],” he said in another speech. “Those who could not influence the will of our country through elections at every instance try another method. Those that could not accomplish provocation through a coup are now attempting a coup through money.”

A promise by gas-rich Qatar to invest $15 billion in Turkey has helped stabilize the lira, but economists say Turkey needs to take many more steps on its own for sustained improvement.

Chance of reconciliation

Politically, Trump and Erdoğan both have a history of taking fierce rhetorical accusations to fever pitch, only to later make up with their foes. For example, North Korean leader Kim Jong-un was “little rocket man” with a “small” nuclear button until, after a surprise summit in June, Trump said it was his “honor” to say he expected a “terrific relationship.”

Likewise, Erdoğan eventually came to terms with Israeli Prime Minister Benjamin Netanyahu after the lethal Mavi Marmara ship incident in 2010, in which Israeli commandos killed nine Turks on a protest ship trying to run the Israeli blockade on Gaza. Erdoğan also stepped down from an incendiary clash with Russian President Vladimir Putin after Turkey shot down a Russian jet fighter that had strayed briefly out of Syrian airspace in late 2015.

“I don’t rule out an Erdoğan-Trump make up at all.... Neither has targeted the other in their criticism – that’s really important,” says Çağaptay, the analyst at WINEP. “Both are known for their very personal style of doing politics, neither Erdoğan nor Trump have said anything bad about each other ... which to me suggests that both want and hope for a reset.”

Such a move, he says, would require the release of Brunson, whose freedom Trump states was a quid pro quo he personally agreed on with Erdoğan at a NATO summit last month, when the two men fist-bumped each other for what Trump said was Erdoğan “doing things the right way.”

For its part, the White House successfully pressed for the release of a Turkish activist held by Israel. But Brunson has yet to be freed.

“I think they’re making a terrible mistake. There will be no concessions,” Trump told Reuters, in an interview Monday.

“Erdoğan may find some face-saving measure that might not be very convincing to the outside world,” says Çağaptay. “But because his supporters control 90 percent of the media in Turkey, they can write the narrative as they like, so that it doesn’t look like a loss of face for him. It can even look like a win for him, when it is not.”

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