# How Will Turkey's Election Shape the Economy?

An episode of [Patrick Boyle On Finance](https://invisiblenetwork.ai/podcast/1547740313), 25 May 2023, 18 min.

Audio: https://anchor.fm/s/fc0914e0/podcast/play/92761921/https%3A%2F%2Fd3ctxlq1ktw2nl.cloudfront.net%2Fstaging%2F2024-9-8%2F387759689-44100-1-7fe002a450ade448.mp3

Send us a textTurkish voters return to the polls this weekend to choose a president. Before the first round of the election, polls suggested that voters were evenly divided between the two biggest parties. However, Erdogan’s unexpectedly strong first round has put pressure on the Turkish lira and knocked other Turkish assets ahead of this weekend’s runoff vote. The official annual inflation rate in Turkey was 43.7% as of April. This is actually down from the 80% inflation rate tha...

## Transcript

[0:00] hello and welcome, you are listening to Patrick boil on
[0:03] finance a podcast, exploring ideas, from quantitative Finance
[0:08] examining events occurring in markets right now and financial
[0:11] history to see what lessons can be taken away including
[0:15] interviews with some of the most interesting people in the world
[0:18] of Finance to learn more about the podcast visit on finance
[0:22] dot-org, Turkish voters, return to the pole Polls this weekend
[0:30] to choose a president. The runoff vote is Uncharted
[0:34] Territory for turkey, which moved in 2017 to an executive
[0:39] presidency from a parliamentary democracy.
[0:42] Before the first round of the election, on the 14th of May
[0:46] poll suggested that voters were evenly, divided between the two
[0:50] biggest parties. However, are the ones
[0:53] unexpectedly strong first round, where he failed to secure an
[0:57] outright majority but scored a much bigger, Share of the vote
[1:01] and his rival has put pressure on the Turkish lira and knocked
[1:05] other Turkish assets ahead of this week's, runoff vote.
[1:10] Turkish assets fell in value. As investors began reversing,
[1:13] the bet they had placed the new leadership might bring turkey
[1:17] back to a conventional economic policy and away from Earth ones
[1:22] idea that low interest rates can cure inflation.
[1:26] The official annual inflation rate in Turkey was for T 3.7
[1:31] percent as of April. This is actually down from the
[1:34] eighty percent inflation rate, the turkey.
[1:36] So the prior year there's no guarantee that they slow down
[1:40] will persist. There is in fact, widespread
[1:43] suspicion that the official numbers under State and
[1:46] inflation rate that according to Independent experts is actually
[1:50] closer to 100% exacerbating. The economic stress in Turkey,
[1:56] is the vast damage caused by the powerful.
[2:00] Earthquakes that destroyed, large parts of Southern turkey
[2:03] and February. In March, government assessment,
[2:06] put the damage at 103 billion dollars are around. 9% of the
[2:12] year's GDP. The economy will be a
[2:15] significant challenge for whoever wins the presidency on
[2:19] Sunday as the high inflation. Along with government largesse
[2:24] and efforts to prop up. The currency are threatening
[2:27] economic growth and could push the re into a deep recession.
[2:31] Another term for president erdogan would likely imply.
[2:35] A continuation of the current policies with a heightened risk
[2:39] of persistent very high inflation and severe currency
[2:44] pressures according to Moody's. The credit rating agency heard
[2:48] Owens government has deployed a range of unconventional measures
[2:52] in recent years to stabilize Turkey's economy, including
[2:57] tight controls of companies. First foreign currency and the
[3:02] 20 21 launch of a special savings account to protect
[3:06] depositors from Lyra fluctuations which I discussed
[3:10] on this channel. Up time, these tools have helped
[3:14] slow the liras fall but the currency is still trading near a
[3:18] record low against the dollar Brad sets are from the Council
[3:22] on Foreign Relations argues that the relatively strong economy of
[3:27] the past several quarters has Has been the product of
[3:31] unsustainable policies so there will most likely be a
[3:34] contraction or recession working Turks will feel poorer when the
[3:39] layer of Falls in value, he said of the local currency.
[3:43] People will find it harder to find a job and harder to get a
[3:47] salary that covers the cost of living net.
[3:50] Foreign assets proxy for the size of turkey's, foreign
[3:54] currency Holdings have declined to minus 13 billion dollars from
[3:59] 1.4. Four billion dollars a year ago,
[4:01] according to Central Bank data, those figures include billions
[4:06] of dollars in funds. Borrowed from the domestic
[4:09] banking system through swaps, pressure on International,
[4:13] reserves has been significant in recent weeks, as the government
[4:17] made efforts to prop up. The economy ahead of Sunday's
[4:21] elections, turkey's, foreign currency and gold reserves.
[4:25] Tumbled, 17 billion dollars in the six weeks leading up to the
[4:29] first Strand of DL action. According to the Ft a decline of
[4:33] fifteen percent. So turkey had a painful
[4:37] experience of high and chronic inflation.
[4:40] From 1975, through 2004 caused by political instability, poor
[4:46] institutions High public sector budget deficits and depreciation
[4:51] of the Turkish lira, which accumulated in a severe
[4:55] financial crisis, in 2000 to 2001 do Establishment of an
[5:01] independent Central Bank in 2001, which focused mainly on
[5:06] fighting inflation, along with tight fiscal policies
[5:09] implemented, at the same time brought inflation under control
[5:14] an economic boom. During Irwin's.
[5:16] First ten years in power transform, Turkish cities and
[5:20] lifted. Millions of people out of
[5:22] poverty, turkey. Transformed from a low-income
[5:25] country into an upper middle-income country.
[5:29] The Poverty rate collapsed between 2002 and 2014.
[5:34] And while still classified as an Emerging Market, turkey was seen
[5:39] as one of the most developed developing countries in the
[5:42] world according to the IMF in 2020, it was the 12th largest
[5:47] economy in the world by GDP. But some of those gains have
[5:51] eroded in recent years as the national currency.
[5:54] Lost 94 percent of its value against the dollar since 2008.
[5:59] And inflation has been extremely high.
[6:03] So what is causing these problems?
[6:06] Well, as you might expect, there are a number of things causing
[6:09] inflation in turkey and putting pressure on the Turkish lira,
[6:13] for example, as an importer of energy and intermediate Goods,
[6:17] turkey is exposed to inflationary pressures caused by
[6:20] the rise in Energy prices and the supply chain disruptions
[6:24] that were seen all around the world over the last few years.
[6:28] Next up, most aging Market currencies performed badly
[6:32] against the US dollar. Once the Federal Reserve began
[6:35] hiking interest rates, higher us interest rates means that
[6:40] Capital that was chasing higher returns in developing countries,
[6:43] is now being brought back to the United States.
[6:47] This has led to an appreciation of the dollar against most
[6:51] Emerging Market currencies. While these issues might explain
[6:55] some of the problems in Turkey. The bulk of the problem is being
[6:59] caused by Surrender, the ones unorthodox Economic Policy of
[7:03] cutting interest rates, during a period of high inflation with
[7:07] the belief that this policy will boost turkeys economic growth
[7:11] and Export potential. Third ones, unconventional
[7:15] economic theory is rooted in Islamic economics and he is
[7:19] invoked Islamic precepts against Usery and refer to interest on
[7:24] loans as the mother and father of all evil to justify his
[7:29] actions. He mostly blames foreign
[7:31] interference for Rising prices and claims that lower interest
[7:35] rates lead to lower levels of inflation.
[7:38] This is the opposite of what most economists believe to be
[7:42] true burdwan argues that if the Lira loses value against the
[7:47] dollar turkey's exports, will simply become cheaper.
[7:51] And foreign consumers will want to buy even more of them.
[7:54] Well this idea does contain some truth, these export gains come A
[8:00] very heavy price for Turkish people.
[8:02] To Turkish economy is heavily dependent on Imports and as the
[8:07] Lira Falls in value imported, products become more expensive.
[8:12] Erdogan has cited in China's economic transformation as
[8:16] evidenced at a low interest rate model would work.
[8:19] And while it's true, the China devalued its currency in the
[8:23] 1980s and 1990s this devaluation was combined with a clearly
[8:28] defined Industrial. Policy.
[8:30] It's not clear. What?
[8:31] Industries, turkey is trying to promote with a currency
[8:34] devaluation. It's also not really settled
[8:38] that this is a winning long, run strategy for China either as I
[8:42] said in a prior video If a country could build an
[8:45] export-oriented economy by simply destroying the value of
[8:48] its currency, Zimbabwe would be the world's Factory today.
[8:53] Spoiler alert. It's not in order to support the
[8:57] Lira and reduce the use of the dollar.
[8:59] And Euros in the country. Turkish authorities have made it
[9:03] more difficult for local consumers and businesses to
[9:07] purchase foreign exchange. Many have turned to gold as a
[9:11] way to protect their savings but turkey suspended gold Imports
[9:15] after the earthquake in February, since gold Imports to
[9:19] meet retail investor demand, were driving up the country's
[9:23] current account deficit. The Turkish Central Bank has
[9:28] instead been drawing down. Its gold reserves to supply the
[9:31] domestic Market. The Turkish general election was
[9:35] previously seen as a potential economic turning point for the
[9:40] country, with the opposition promising, a series of economic
[9:44] reforms during his election campaign.
[9:47] Third, one showed no intention of changing his policies
[9:51] doubling down on his claims. That low interest rates would
[9:54] help the economy grow by providing cheap credit to
[9:57] increase Turkish. And exports, you will see as
[10:02] interest rates go down. So we'll inflation.
[10:05] He told supporters in Istanbul. In April, we will work
[10:09] relentlessly until we make turkey, one of the ten largest
[10:13] economies in the world. He said at another election
[10:17] rally earlier this month. The Turkish government has been
[10:21] selling foreign currency reserves to prop up the price of
[10:25] the Lira during one week in early May the reserves to Blind
[10:30] by seven point six billion dollars.
[10:32] The largest such decline in more than 20 years.
[10:36] I discussed this strategy in my video about Egypt a few months
[10:40] ago that it makes no sense to spend a country's valuable
[10:44] foreign exchange to pump up the value of a falling local
[10:48] currency. As while it might work in the
[10:50] very short term you're squandering the wealth of the
[10:54] nation for a temporary effect that disappears as soon as you
[10:58] run out of foreign exchange. Or stop by exchanging, something
[11:03] of value for something less valuable to support its price.
[11:07] Just makes no sense. Erdogan has reached agreements
[11:12] with countries including Qatar Russia and Saudi Arabia to help
[11:16] prop up Central Bank Reserves. Saudi Arabia announced a five
[11:21] billion dollar deposit in March and Russia agreed to delay at
[11:25] least some of turkeys payment for natural gas Imports on Until
[11:30] after the election, third one's ability to get financing from
[11:34] friendly. Countries is quite impressive,
[11:37] even countries that themselves aren't exactly friends have
[11:41] learned huge sums to the turkey Central Bank but at some point
[11:45] turkey will presumably exhaustive Financial patience of
[11:49] its new non-market creditors. There's a very good video by
[11:53] money in micro a few months ago on this topic that I would
[11:57] recommend watching. We have many of these agreements
[12:01] with other countries have not been made public and paying back
[12:05] many of these political favors may become complex in the
[12:09] future, but economists are saying that they are part of a
[12:12] short-term strategy more focused on winning an election than on
[12:17] ensuring the country's long-term financial help with the cost of
[12:22] living crisis, on many voters Minds third, one launched, a
[12:26] range of expensive policies in the lead-up to the election.
[12:29] Ian aimed at reducing the immediate impact of inflation on
[12:34] voters. He raised the minimum wage.
[12:36] Repeatedly announced a free month of natural gas for
[12:40] consumers, reduced electricity prices, increased civil
[12:44] servants, salaries, and changed government policies.
[12:48] To allow millions of Turks to receive early government,
[12:51] pensions just days before. The first round of the election,
[12:55] he gave a 45 percent, pay rise to 700,000.
[12:59] Catch public sector workers saying he would not let anyone
[13:03] be crushed by inflation. All of those commitments will
[13:08] need to be honored by whomever wins the election.
[13:11] Meaning that greater government spending can be expected, one
[13:15] way or another. In addition, to honoring this
[13:18] new spending a new Administration, no matter who
[13:22] wins. We need to respect our to ones
[13:24] Financial agreements with other countries, used to bring in
[13:27] foreign exchange to the Central Bank.
[13:30] The terms of many of these deals are not clear, most analysts.
[13:35] Give third one an edge in the election because of his strong
[13:38] showing in the first round and the likelihood that he'll
[13:41] inherit significant votes for mr.
[13:44] Ogon who formally endorsed? Heard one on Monday 3rd Owens
[13:49] political party and its allies also maintained their majority
[13:53] in Parliament allowing erdogan to argue that voters should
[13:57] choose him to avoid a divided. Government.
[14:00] If ardoin sticks to his existing strategies economists, expect
[14:05] the currency to sink further. The government to impose
[14:08] restrictions on foreign currency withdrawals and the state to
[14:12] soon run short of foreign currency to pay its bills.
[14:17] So how can turkey get out of the policy trap of low interest
[14:21] rates and high inflation? Well, Adam 2's argues, on his
[14:25] podcast, that ardoin might pivot.
[14:28] Once he wins the election, even in the same way that she did in
[14:31] China, once he had won his third term and quickly ended the zero
[14:36] covid policy in China. The difficulty for erdogan is to
[14:41] pivoting from low to high interest rate will also hurt,
[14:44] but it'll hurt a different group of people than were hurt by low
[14:48] rates and inflation. This might be politically
[14:52] difficult to do for a country in crisis.
[14:55] Turkeys problems are not that difficult to solve, it's not A
[14:59] basket case economy, like some other Emerging Markets, the
[15:03] country mostly just needs a sensible interest rate policy
[15:07] and an independent Central Bank. Turkey, is a lot of positives.
[15:11] It has a diversified economy. Growth is good, it is good
[15:15] demographics and an educated Workforce.
[15:18] There are, of course, issues with corruption in Turkey, but
[15:21] they're not as bad as in many Emerging Markets.
[15:25] If the opposition came to power, they would need both.
[15:29] Short and medium term plans to bolster the government's
[15:32] finances, and restore the confidence of investors their
[15:36] ability to maneuver. If elected would be restricted
[15:40] by Ireland's party, and its allies who have a majority in
[15:44] Parliament. If the president continues to
[15:47] pursue a program of interest rate Cuts, then the Lira will
[15:51] fall further and prices will continue to rise in those
[15:55] circumstances. The only way for Turks to defend
[15:58] their savings will be To turn to a currency outside of erda ones
[16:02] control, which is what most Turks have already been doing
[16:07] the good news for turkey, is that it's a dynamic economy, the
[16:11] government itself is not heavily indebted and the economy is
[16:15] sound enough to sustain growth. If ardoin wins as most analysts.
[16:19] Now, expect the question is, can he find a face-saving way to
[16:24] Pivot to a more sensible economic policy?
[16:28] And does he even And the need to change policy if he can craft a
[16:33] strategy that doesn't look like he's surrendering.
[16:36] He may be able to save face and improve the economic situation
[16:40] in Turkey in the coming years. Thanks for tuning in to this
[16:44] week's podcast. If you found it interesting,
[16:47] make sure you subscribe and tell your friends about it.
[16:50] The podcast is ad-free and entirely financed by my patreon
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[16:57] Have a great day and talk to you again soon.
[16:59] Soon. Bye.
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[17:19] Boil. Thanks for listening.
[17:21] Bye.

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