Turkey cannot endure a two-year ‘election economy’

It is widely expected that the Turkish economy will struggle on multiple fronts in 2018. What’s more, the prospect of a rise in populist decision-making in order to overcome these difficulties might disrupt the balances even further.

In 2017, the global climate provided a good environment for countries like Turkey and the government also increased its economic incentives. The biggest decision that supported growth was the Treasury’s move to give incentives to credit guarantee funds. With this “doping” effect Turkey was able to reach a high growth figure, but it is does not look possible for this to continue.

At this point, many expect the government to keep intervening in order to stop growth figures from falling. Considering the fact that we have local, parliamentary and presidential elections due in 2019, the government is likely to continue making populist decisions in order to keep voters mobilized. If the elections are held on schedule, this situation will continue for the next two years.

But frankly the Turkish economy cannot endure two years of political campaigning, bearing in mind its current vulnerabilities.

The ruling Justice and Development Party (AKP) often boasts about not pursuing “election economics” and maintaining fiscal discipline even in the hardest times. Indeed, it is not entirely wrong to say this, as it is well-known that part of the party’s election success is down to the fiscal discipline it has pursued.

However, last year saw a rise of economic populism in Turkey. A significant rise in spending had actually already taken root with Binali Yıldırım’s taking over as prime minister back in 2016, but the continuation of hot money flows - caused by the delay in financial normalization in advanced economies - compensated for the rising spending.

This prevented populist policies from come into the spotlight in Turkey, and the negative impacts of populist decisions taken in 2017 were veiled by the incoming hot money flow.

Off-budget spending

In order to maintain high growth figures, the Turkish government will probably continue encouraging the credit guarantee funds, in addition to other stimuluses and state assistance. However, if this coincides with a period of financial normalization globally then the results could be different.

The expectation that global oil prices will rise in 2018 could further worsen the situation, while domestic political conflicts and instability are also likely to take the stage this year. What’s more, Turkey may well be facing fines and sanctions of a number of banks following the recent case in New York against a former general manager of state lender Halkbank.

All this shows that the government could become even more isolated and frustrated abroad, which could lead to more political tension and economic difficulties at home. Indeed, we have already started seeing signs of these tensions within the AKP itself.

Can the government get through this year without following populist policies?

Well, the decision to continue the “100-lira support” for individuals when determining the minimum wage fell outside the government’s plan for the 2018 budget. So we can say the new year started with “extra weights” in the budget.

Expectations that inflation will keep rising will negatively impact Turkey’s growth and tax collection, but many also expect a tax amnesty for businesses as well as continued credit guarantees in 2018. Personally I also do not see the populist decisions of 2018 ending there.