(Bloomberg) — President Recep Tayyip Erdogan’s push for lower borrowing costs aims to transform the economy into a job-creation engine that’ll keep him in power when elections come around in 2023, but it’s ordinary Turks who are so far paying the price.
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Turkey would no longer try to attract foreign inflows by offering high yields and a strong lira, Erdogan announced last week, abandoning a market-friendly approach that helped establish it as a major emerging market but set off a boom-and-bust cycle that’s lasted more than a decade.
As far back as 2013, elevated inflation, a gaping current account deficit and currency pressures saw Turkey listed among the Fragile Five nations heavily reliant on foreign inflows and vulnerable to ups and downs in the global economy.
With his new vision, Erdogan is betting cheaper credit and a weaker lira will boost manufacturing and exports, cut labor costs and increase hiring, reducing the market’s hold on the Turkish economy.
The formula is tried and tested. Export-focused growth has transformed some Asian economies, but time is not on Erdogan’s side. He has less than 18 months to pull off an about-turn that’s taken a generation elsewhere — and deliver the payoff to voters before they go to the ballot box.
The risks are high. For now, the lurch toward lower interest rates has dragged the lira to record lows and driven inflation above 20%, leaving many Turks struggling to make ends meet. Worst affected are working class families, Erdogan’s traditional base, but even exporters who stand to benefit from a weaker currency are struggling to adjust to the volatility.
This is how Erdogan’s new approach could work and the obstacles he’ll face:
1. Mind the Gap
One of Turkey’s key challenges during the Erdogan era has been its chronic current account deficit.
A shift to a weak lira policy could help close that gap as Turkish products become cheaper abroad, earning dollars and euros and drawing foreign direct investment in the real economy. That could eventually help stabilize the lira and reduce reliance on “hot money,” or fickle foreign inflows into securities.
The flip side is that overseas investors have fled Turkish bond and currency markets as yields tumble, while the cost of imports has risen sharply, fueling inflation and putting items such as mobile phones and computers beyond the reach of many.
Turkish stocks are now cheaper for foreigners though, and are attracting strategic investors such as Abu Dhabi’s securities exchange, which announced a partnership with Borsa Istanbul last month.
2. Cheap Tricks
Erdogan’s hopes rest on turning the trade …….
Source: https://finance.yahoo.com/news/erdogan-plan-financial-independence-5-042041850.html
