Erdogan Economy Isn't Tanking Like Lira as Turkey Heads to Polls

(Bloomberg) -- The economic numbers say Turkey is booming. The financial markets seem to think it’s on the verge of a crash.

In the streets and shops of Mersin, a large city on Turkey’s Mediterranean coast, there’s little evidence of either extreme. Business-owners are feeling the squeeze from double-digit inflation and a currency that’s slumped 25 percent this year. But many say they’re inclined to stick with the government of President Recep Tayyip Erdogan, who’s seeking re-election in what may prove a knife-edge vote next month.

Erdogan Economy Isn't Tanking Like Lira as Turkey Heads to Polls

“Yes, prices are higher and our profit margin is falling,” said Mehmet Kurt, 38, a kitchenware wholesaler. About a third of the items in his large store come from China, and the rest are getting more expensive too because their local producers use imported steel and plastics.

“But this is temporary,” said Kurt. “The government can’t make things better, but it’s stopping them from getting worse. If we change Erdogan, will whoever comes in do any better? That’s the concern.”

Rate Surrender

With an economic growth rate of 7.4 percent last year, Turkey has been racing ahead of its peers. In recent weeks, investors have begun to worry that the wheels could come off. All the fragilities of the Erdogan economy came into focus. Bloomberg’s Chief Middle East Economist Ziad Daoud expects economic growth to slow to 3.7 percent next year, while inflation remains firmly above 10 percent, more than twice the central bank’s 5 percent target.

A widening trade deficit has to be plugged with foreign cash. Turkish companies have racked up debts in dollars and euros that are now much more expensive to repay. And the president has fiercely opposed the higher interest rates that most economists prescribe -- though he had to give way last week, green-lighting an emergency hike to halt a run on the lira.

But even if the economy is headed for trouble, the crunch probably won’t come before Turks cast their ballots on June 24, according to Mert Yildiz, founder of Istanbul-based economic consultancy Foresight.

Only about 2 percent of the electorate is directly hit by market volatility, Yildiz estimates. “For the opposition to defeat Erdogan, at least 8 percent of voters should swing sides,” he said. “There needs to be a severe impact from financial markets to the real economy for that kind of voter shift.”

Running Hot

Most polls show the president far ahead of rivals but short of the 50 percent needed for a first-round win -- opening the way for a risky runoff, in which an “anyone-but-Erdogan” candidate would stand a chance.

Surveys like the one by Ankara-based MAK this month rank the economy as the top voter concern. Erdogan and his AK Party came to power after the financial crisis and recession of 2001, which swept away Turkey’s established parties, and they’re working hard to avoid a repeat.

With the economy running hot, elections were brought forward by 18 months. The government has enacted a series of stimulus programs, mostly aimed at merchants and small-to-medium businesses, a key chunk of the party’s base. State-guaranteed loans made it easier for entrepreneurs and farmers to borrow.

Arguments over those policies are raging in Mersin, a competitive constituency where all four main parties won seats in the last election in 2015.

‘The People Know’

Abdullah Baser, a 58-year-old AK Party official, points to a cap on gasoline and diesel prices that cushioned the impact of the lira’s slide. “At the gas pump it’s been bypassed, thanks to the government’s precautions,” he said. “The people know this.”

Nedim Karakas doesn’t think such measures are enough.

“They’re all save-the-day solutions,” said Karakas, whose tobacco and liquor store is across the street from an AK Party branch office. “The problems will come back.”

Karakas says business is terrible: the Islamist-rooted AK Party has raised taxes on alcohol, and the lira’s slump has made it impossible to renew stocks of imported whisky. He’s sometimes tempted to shut up shop and look for work, “but there are no factories in Mersin to work in.” Karakas said he’s always voted for Erdogan, but is undecided this time. “On the economy, the government is doing something wrong.”

‘Cases of Fear’

The AK Party’s line on the lira is that foreign manipulation has caused its decline. That argument resonates with voters, pollster MAK said in a summary of its recent survey.

One reason is Turkey’s government-dominated media, which means that “all the information about the economy is channeled through a filter,” said Ozgehan Senyuva, an associate professor at the Middle East Technical University in Ankara.

There’s another factor that may count in Erdogan’s favor.

The crash of 2001 showed that Turkish voters deal out severe punishment for economic mismanagement once its full impact is felt. But when a collapse is something feared in the future, instead of a present reality, they may prefer to stick with the rulers they know, according to Senyuva.

“In cases of fear, people tend to repeat the last decision that worked,” he said. “You don’t take risks.”

©2018 Bloomberg L.P.