Mehmet Simsek is a small, ebullient technocrat. Up until a couple of months ago, he was one of the few officials in the Turkish government fighting to stave off a financial and economic crisis in this important emerging market. But after Turkish President Recep Tayyip Erdogan secured a fresh mandate in June’s general election, Simsek was unceremoniously kicked out. In his place as a minister overseeing the economy is Erdogan’s son-in-law. Such is the melodrama unfolding in the highest echelons of the Turkish government. While such intrigues were once confined to Turkey, the financial and economic crisis now unfolding poses a threat to other emerging markets and the global economy. Cast your eye across emerging markets being pulled under by Turkey and a simple question comes to mind: Where have all the Simseks gone?
Despite the fever pitch of news coverage, little is new or surprising about the crisis in Turkey. In his quest to transform the government to guarantee his near-limitless power, Erdogan put his country in grave economic danger. Ignoring the advice of central bankers to raise interest rates to fight inflation, as well as caution from the likes of Simsek about Turkey’s dangerous current account deficit, Erdogan focused on short-term goals that would translate to votes in crucial elections. “Everything will be taken care of after the AKP secures power,” was a common refrain. “AKP” is the Turkish acronym for Erdogan’s Justice and Development Party.
Ironically, Erdogan and the AKP rose to prominence thanks to savvy economic maneuvering that positioned Turkey as the darling of emerging markets after the punishing global financial crisis that began in 2008. As investors looked to economies such as Brazil and South Africa for better returns than developed markets under recession or with low growth, Turkey emerged as the favorite. With its ideal geographic position between East and West and profitable industrial sectors that include construction, tourism and agriculture, Turkey was a great bet. Moreover, the AKP’s low-profile regional policy, perhaps best captured by the phrase, “No problems with neighbors,” was particularly comforting in a region bristling with tension. Unfortunately, this didn’t last. As the Arab Spring swept through the region, Erdogan, rightly sensing profound change underfoot, nevertheless bet on the wrong horse.
His quest to reposition Turkey as a neo-Ottoman empire with Istanbul as its capital, and him as the new sultan, led to Ankara’s support of the Muslim Brotherhood in Egypt and Gaza. At the same time, the AKP’s “neighborhood strategy” fell apart as Turkey took a militantly anti-Assad position. Several rebel groups began using Turkey as a launch pad for their war in Syria. Then, increasing domestic protests threatened Erdogan’s grip on power.
With his political calculations falling apart and internal opposition growing, Erdogan trained his focus on solidifying his own power in the office of the president. Transforming the presidency into a powerful office and rewriting the constitution required several elections and referendums.
This was the point, around 2013, that Turkey’s economic crisis began to grow to grave proportions. With the US economy rebounding – and along with that the US dollar gaining strength – Turkey’s current-account deficit ballooned. But instead of taking prudent measures needed to stabilize the economy, including a tightened monetary policy, the central bank was made to bend to Erdogan’s will. Interest rates were persistently kept low because the last thing he wanted was high borrowing costs before an election. “Just elect the AKP and economic problems will be resolved” was another of party’s refrain in a serial run of elections.
Instead, economic problems mounted, as one would expect when economic fantasy elbowed out any semblance of orthodoxy. And now with the lira plunging and Erdogan unable or unwilling to take steps to ease the foreign-exchange crisis, Turkey’s financial problems are instructive for other emerging markets. First, debt is a scourge. As the US economy continues to strengthen, external debt in emerging markets such as South Africa, India, Argentina and Turkey will be an increasing drag on those countries’ domestic economies.
Next, high current-account deficits in many emerging markets do not appear to be diminishing in the near term, meaning inflows of expensive foreign capital will be needed to shore up the balance of payments. South Africa, slowly clearing out the rot left by former President Jacob Zuma, faces a high current-account deficit and has seen its currency drop 17 percent against the dollar this year. Argentina, in a surprise five-percentage-point interest rate hike this week, is trying to get ahead of the curve. But the writing is on the wall for many vulnerable markets.
For the past decade, global investors looked to emerging markets and saw leaders like Simsek – smart, cautious and eager for their countries become real players on the global stage. Now, the Turkish crisis reveals the dark side of this story: Reckless leaders able to wield outsized power at any cost to ensure their own longevity are detrimental to the economy. While Turkey is the epicenter of the current crisis, expect tremors to radiate out further as the summer progresses.
AFP PHOTO/dpa/Uwe Anspach