Turkey Enters Recession, a Blow for Erdogan as Elections Near
Turkey has entered a recession, recording two consecutive quarters of falling economic growth, according to government figures released Monday, casting a blow for President Recep Tayyip Erdogan ahead of critical local elections at the end of the month.
Mr. Erdogan has led Turkey through 18 years of continuous growth — making it a leading emerging market — but much of the growth of the last few years has come through unrestrained borrowing. The lira also plunged in value in mid-2018, amid global investor concerns and a sharp fall in consumer demand.
The Turkish Statistical Institute announced that Turkey’s gross domestic product shrank by 2.4 percent in the fourth quarter of last year compared to the previous quarter, after season al adjustments. That fall followed a decline of 1.6 percent in the third quarter. A recession occurs, by some definitions, after two quarters of contraction.
The recession arrives in the midst of a global economic slowdown that has reduced demand for Turkish exports and raised the cost of credit for its businesses. Growth in the European Union, Turkey’s most important market, has slowed to a crawl while Italy is in recession and Germany close to one.
Economists have been warning of a recession for months as foreign investment in Turkey dried up over growing concerns about the rule of law as well about its economic policies. Turkey’s growth was fueled in part by the availability of cheap foreign credit, but that credit flow has slowed, as in other emerging markets, after the Federal Reserve in the United States raised interest rates.
The government has been subsidizing big infrastructure projects like bridges, subways and Istanbul’s new airport, planned as the world’s busiest. Many businesses have borrowed in foreign currencies, which means their debt burdens rose as the lira fell.
By the end of the year Turkish private sector companies owed more than $250 billion in foreign debt, or nearly one-third the size of the country’s economy.
For all of 2018, Turkey still achieved growth of 2.8 percent, but the economy took a precipitous turn midyear as the lira weakened. Investment agencies have revised Turkey’s credit ratings and Turkey’s banks have almost stopped lending.
Borrowing has become more expensive for Turkey and other emerging markets because investors have become wary of the risk, while rising interest rates and buoyant stocks have lured money back to the United States. Turkey has also been particularly hard by President Trump’s trade war. United States tariffs on Turkish steel imports are 50 percent, double the duties on steel from other countries.
Bankruptcies, meanwhile, rose in the last months of 2018 and inflation has remained over 20 percent for months.
Mr. Erdogan has ruled out turning to the International Monetary Fund for funds, emphasizing that he had taken Turkey out of an earlier program with the fund and paid off its debts. He has instead courted investment from Arab Gulf countries and reduced some public spending.
Since a failed coup d’état two years ago that attempted to topple him, Mr. Erdogan has assumed more power over government agencies, including economic policy. He was re-elected in June and has brought all branches of government under the presidency.
He appointed his son-in-law, Berat Albyrak, as minister of finance and Treasury and through him has kept close control of the Central Bank. When Mr. Erdogan commented just before the election that he intended to be more involved with the bank, the lira sank to record lows.
The central bank halted the rout by lifting rates but its integrity was in question. The Turkish currency lost 28 percent of its value in 2018.
The currency’s decline, as well as other factors, has hit Turks in their pocketbooks. Mr. Erdogan, who is personally leading his Justice and Development Party’s campaign for local elections, has opened subsidized markets stalls around the country to sell cheap vegetables to ease discontent.