An economy so hot it faces a crisis
YENIKOY, TURKEY— Looming like a fortress over the Black Sea, Istanbul’s new airport has been engineered to provoke awe, underscoring Turkey’s desire to reclaim its imperial glory.
The project is expected to cost nearly $12 billion (U.S.) and carve six runways across a swath of land as big as Manhattan. When completed in a decade, the complex is supposed to transport about 200 million people a year, dwarfing all rivals as the busiest airport on the planet.
But the airport has also become a symbol of a less savory aspect of Turkey’s modern-day incarnation: its reckless disregard for arithmetic and the independence of critical government institutions. Together, they have placed the nation at growing risk of sliding into a financial crisis.
In a global economy increasingly plagued by worries — from an unfolding trade war to higher oil prices — Turkey may present the most immediate cause for alarm. The country’s president, Recep Tayyip Erdogan, who has dominated national life for 15 years, was sworn in again Monday following a re-election victory that came with extraordinary new powers. He has wielded his influence to deliver relentless economic growth through unrestrained borrowing, lifting debt levels to alarming heights. And the additional authority he has been granted is expected to further test the limits of economic reality.
In a conspicuous sign of unease among global investors, the value of Turkey’s currency, the lira, has plunged by roughly one-fifth this year, raising prices for households and businesses alike. It dropped some more Monday, as Erdogan handed the job of economic chief to his son-in-law, in what markets construed as a sign that he does not intend to adopt a more responsible mode of stewardship anytime soon.
The airport — its first phase is to open in October — has been brought to life with heaps of public money delivered to construction companies closely tied to Erdogan. The government has bestowed upon them guarantees against any losses. If, as many economists expect, the airport proves grander than the flow of passengers, the public will wind up with the bill.
To villagers who have been shoved off their land to make way for the new airport, the project has become a monument to their worst fears. “Erdogan is watching out for his own people,” said Bora Dayilar, a farmer whose grazing land was subsumed by the project. “We are left with nothing.”
Fears of disaster may seem out of place in an economy that remains one of the fastest growing on earth, expanding by 7.4 per cent last year. But that growth has been fed by potentially unsustainable borrowing, both public and private.
The government has been subsidizing vast infrastructure projects like the airport and a $13-billion, 45-kilometrelong canal linking the Black Sea to the Sea of Marmara. And many businesses have borrowed in foreign currencies, which means their debt burdens have risen as the lira surrenders value.
Major Turkish companies are now trying to persuade banks and other credi- tors to extend relief, perhaps portending a wave of bankruptcies that could leave financial institutions and taxpayers staring at untold losses. As of the end of April, Turkish private sector companies owed more than $245 billion (U.S.) in foreign debt, or nearly one-third the size of the country’s overall economy.
“That’s a huge number,” said Selva Demiralp, an economist who previously worked at the Federal Reserve Bank in Washington and now teaches at Koc University in Istanbul. “And the government is encouraging them to borrow more.”
Staying current on that debt requires that foreign investors continue to entrust funds to Turkey — an increasingly questionable proposition.
Turkey can court money by continuing to lift interest rates, already at 17.75 per cent. But that would depress economic growth and end the festivities for the real estate and construction industries.
Or Turkey can continue the growth party while watching inflation mount as the lira sinks further. That may condemn crucial corporations to insolvency and perhaps force the government to seek a rescue from the International Monetary Fund, a course that would surely entail painful spending cuts.
“Turkey could be the next country to disintegrate,” said Marie Owens Thomsen, global chief economist at Indosuez Wealth Management in Geneva. “It has all the ingredients of the beginning of a failed state.”
Some of Turkey’s problems reflect the troubles assailing emerging markets in general.
As the Fed raises interest rates in the United States, investors have been pulling money out of developing nations like Argentina, Mexico and Turkey while betting on the dollar. That has pushed down the value of emerging market currencies.
But Turkey stands out as a uniquely vulnerable economy given its unorthodox financial stewardship.
Ever since a failed coup d’état that sought to topple him two years ago, Erdogan has opened the credit taps to ensure continued economic growth. The central bank has sought to restrain growth, lifting rates to stabilize the lira and contain inflation. This has provoked the wrath of the president.
Erdogan has claimed that inflation is actually the result of high interest rates, which is not unlike asserting that chemotherapy causes cancer. Before the elections, he threatened to assume control of Turkey’s central bank and to abolish high rates. Investors took that as further impetus to flee, pushing the lira down to record lows.