Turkey’s Overheating Economy

Last month Turkey announced the statistics related to its economic growth. To the surprise of many people, Turkey had clocked in annual growth of 7.7% per annum. The quarter before this one, Turkey had clocked in growth which was more than 11%. Hence, 7.7% was actually a slowdown of sorts. Turkey’s rapidly increasing growth rate has come as a surprise for many. This is because it is growing faster than China and India, two of the fastest growing economies in the world.

However, it seems like Turkey has been following the wrong strategy to achieve this growth. This is because international financial bodies do not seem to be impressed by its growth. Instead, international financial bodies like International Monetary Fund have started issuing warnings about the galloping growth rate in Turkey. Many experts believe that Turkey is moving towards becoming a classic case of an overheated economy.

In this article, we will have a closer look at the story of Turkey’s economic growth.

• Political Reasons: The present spurt in Turkey’s growth rate seems to be the result of political reasons instead of economic ones. The failed coup last year could not displace President Erdogan from power. However, it was a severe blow to his reputation. Erdogan knows that economics changes the perception of the people regarding governments. Hence, he is adamant about having a bullish economy before the election. Therefore, he has started implementing policies that cause a temporary increase in the GDP even though their long-term effects might not be good. Erdogan may also be concerned about his performance in the elections after the fallout from his erstwhile ally Gulen. In the past, Erdogan has won the elections easily. However, this will be the first election Erdogan will be fighting without the support of Gulen.

  Economic decisions made to achieve political objectives end up ruining the economy. It is for this reason that institutions like IMF are worried about the future of the Turkish economy.

• High Inflation: A huge chunk of Turkish GDP growth has been created as a result of government spending. This spending is being done by printing new money and bringing into existence. President Erdogan has backed this policy despite international criticism. As a result, the inflation rate in Turkey for the past year has been 12%. Since the nominal GDP growth rate is 7% and the inflation rate is 12%, the real growth rate is actually negative. Hence, Turkey’s economy is not really doing well. Instead, an attempt is being made to create an illusion about the strength of the Turkish economy.
• Current Account Deficit: The current account deficit in Turkey has reached worrying levels. This is because the households are also spending a lot of money thanks to the cheap credit policies being undertaken by the government. However, the problem is that Turkey does not have the foreign exchange to pay for all these imports. In the short run, Turkey is dependent upon foreign investments and loans. These investments provide the country with the foreign exchange reserves needed to settle their transactions. If for some reason, other countries stop investing in Turkey’s economy, it would no longer have the foreign exchange reserves to pay its bills. This is a precarious situation and Turkey needs to ensure that it builds up foreign exchange reserves before it starts importing on a large scale.
• Oversupply: A large chunk of government and private money is going in the infrastructure sector. As a result, there has been an oversupply in this sector. The problem is that Erdogan has set up ambitious growth targets. In order to meet those targets firms will be forced to undertake even more construction in a market which is already plagued by oversupply. Since inflation cannot continue forever, the government will someday have to impose stricter monetary policies in the future. Stricter policies will lead to a sudden drop in prices. It therefore seems like the reckless growth being pursued today is setting up the economy for a boom and bust cycle.
• Low Debt: The positive point about all this is that Turkey has a very low debt ratio. Its total debt to GDP is only 30%. Hence, in the short run, Turkey may be able to avoid bankruptcy by raising money from the markets. However, at the present moment Turkey has no way to pay the money back. Hence, unless such a way is discovered, Turkey will only be postponing its financial doom to a later date!

There is another major problem with this strategy. The cost of funds is on the rise in Europe as well as America. It is expected that this bear cycle will last at least for a decade. Countries are trying to reduce their dependence on debt since interest payments are likely to consume a greater part of the GDP in the future. In such difficult times, Turkey is doing the exact opposite and the policies being pursued might increase its dependence on debt. Turkey might end up borrowing some very expensive funds as a result of these policies.

The problem with Turkey is that President Erdogan has won the past five elections because he has been able to deliver on the promise of economic growth. Hence, he wants to repeat the process and win a sixth term. However, in doing so, he may end up pushing the Turkish economy to the brink of disaster.

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.