Erdogan party split on economic plan as Turkey runoff looms, sources say
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[May 25, 2023]
By Ebru Tuncay, Orhan Coskun and Nevzat Devranoglu
ANKARA (Reuters) -Days before Turkey's runoff presidential election,
there is disagreement and uncertainty within Tayyip Erdogan's government
over whether to stick with what some call an unsustainable economic
programme or to abandon it, insiders say.
According to interviews with nine sources, either government officials
or others with direct knowledge of the matter, an informal group of
ruling-party members have gathered in recent weeks to discuss how it
might adopt a new policy of gradual interest rate hikes and a targeted
lending programme.
Erdogan is not directly involved in the talks, which include some AK
Party members who are outside the administration but held senior
positions in the past, four of the sources said, requesting anonymity to
discuss the private meetings.
On the other side are officials and cabinet members who publicly state
they want to stick with the current programme of boosting exports and
economic growth via rate cuts and heavily-managed forex, credit and debt
markets.
Given Erdogan led after the initial vote, much is at stake for the major
emerging market economy that has been gripped by a cost-of-living crisis
and series of currency crashes.
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With foreign reserves tumbling, some analysts say Turkey could face
another economic crash as soon as this year that sends inflation soaring
again and strains its balance of payments - unless the government
changes course.
"They are studying a new economic model... since the existing model
cannot be sustained," said a senior official close to the matter.
"Basically, it would gradually raise the interest rate and end the
structure of using multiple rates."
The group has not yet presented the full plan to Erdogan, the official
said.
Erdogan's office was not immediately available for a comment.
Seeking to extend his reign into a third decade in the Sunday runoff,
Erdogan has said in the campaign that interest rates would decrease as
long as he is in power, and inflation would be brought under control.
All sources said there is no suggestion Erdogan has made a decision and
most said he has previously heard the concerns over growing economic
strains and depleted foreign reserves.
Three of the sources said he could stay the course for the next several
months at least, emboldened by a better-than-expected result on May 14
when he took 49.5% of the first-round vote versus his challenger Kemal
Kilicdaroglu at 44.9%.
Analysts say the president is in pole position to win the runoff.
"There are two different opinions within the party," another source, a
ruling AK Party official, said. He added that any decision would seek to
preserve economic stability through to the next critical election test:
municipal polls in March next year.
A third official said the strong election results could ultimately
convince leaders "that a rapid change is not needed."
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PIVOT POSSIBILITY
The lira has shed almost 80% of it value to the dollar in five years
largely due to Erdogan's economic policies, economists say. It has
touched new record lows since the initial vote while measures of
investment risk have soared.
Kilicdaroglu's opposition alliance pledges to reverse Erdogan's
programme with aggressive rake hikes and a return to free-market
principles, a prospect that cheered international investors ahead of the
elections.
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![](../images/052523PIX/news_x95.jpg)
Vendors stand in their stall outside a
local office of President Tayyip Erdogan's ruling AK Party, ahead of
the May 28 runoff vote, at a fresh market in Istanbul, Turkey May
23, 2023. REUTERS/Dilara Senkaya
![](http://archives.lincolndailynews.com/2023/May/25/images/ads/current/atlantabank_lda_SFARM_2023.png)
Though a self-proclaimed "enemy" of interest rates, Erdogan has on
occasion taken a more orthodox approach when faced with past
economic crises, before pivoting back.
The informal group working on a new plan is not considering
aggressive monetary tightening, but rather a more gradual path that
again emphasises the policy rate in lending markets, four of the
sources said. Another option is using a public institution and state
subsidies to deliver selective credit, they added.
Several ideas were considered, the details of which were unclear. It
was also unclear whether the group had pitched the plan to Erdogan,
or his level of interest in it.
Fitch said Turkey's "B negative" credit rating depends on whether
the post-election policy "becomes more credible and consistent"
given the pressure on the lira, wide current account deficit,
declining reserves and high inflation.
'VERY BLEAK OUTLOOK'
The president appointed a new economy minister and central bank
governor in 2021 to begin slashing interest rates to 8.5% from 19%
at the time.
This sparked a historic currency crash in late 2021 and sent
inflation above 85% last year, prompting more than 100 new
regulations that discouraged foreign currency holdings and ramped up
banks' bond holdings.
The central bank's policy of stabilising the lira, meanwhile, sent
its net foreign reserves into negative territory for the first time
since 2002, while the bank has also sold $9 billion in gold since
March to meet pre-election demand.
Authorities could seek more FX from foreign allies, or further
suppress demand which could slow growth and risks clamping down
further on capital, economists say.
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"It all points to a very bleak outlook. It's hard to believe that
this can be sustained," said Francesc Balcells, CIO of Emerging
Markets Debt at FIM Partners.
"You could argue (Erdogan) could have a change of heart and then
embrace orthodoxy," he said. "I'm not ruling it out... But at the
end of the day, I think the basis of his economic beliefs will not
change."
Ahead of the elections, Erdogan hinted at a possible change when he
said former finance minister Mehmet Simsek, who is well know by
international investors, could return to government to help shape
policies.
But it remained unclear what if any role Simsek might play if
Erdogan wins the runoff, the interviews showed.
Officials who want to stick with the current programme say its
selective loan policies prioritising technology, energy, natural
resources and tourism are estimated to contribute cumulatively some
$289 billion to the current account balance by 2030, thus supporting
the currency.
(Additional reporting by Rodrigo Campos in New York; Writing by
Jonathan Spicer, Editing by Alexandra Hudson)
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