Ankara’s finances were weak before the pandemic—but the combination of external debt, a public health crisis, and a president who chooses to protect his reputation rather than his people could spell disaster.
By Aykan Erdemir and John Lechner, FDD
The investor Warren Buffett once pithily remarked, “Only when the tide goes out do you discover who’s been swimming naked.” The COVID-19 pandemic has caught both governments and the private sector in every country off guard, but Turkish President Recep Tayyip Erdogan, through years of political and economic mismanagement, has put his nation in arguably the most vulnerable position of all major emerging markets.
If Erdogan insists on doubling down on his past mistakes, he will bring further economic ruin to Turkey, with financial and geopolitical consequences that endure far beyond the pandemic’s end.
As of April 7, Turkey had more than 34,000 coronavirus cases, with one of the world’s worst reported trajectories in terms of infection and with confirmed cases doubling every six days, compared with the world average of nine. However, there is concern that even this worrying figure is an undercount. When Ankara reported its first confirmed case on March 11, becoming the last major economy to do so, Ergin Kocyildirim of the University of Pittsburgh School of Medicine wrote a warning the same day under the title “Turkey’s Coronavirus Coverup Is A Disaster Waiting To Happen.” On March 28, the financial analyst Inan Dogan, whose model had accurately predicted the trajectory of the U.S. death toll, estimated that “1 out of every 150 people in Turkey is infected with the coronavirus,” forecasting the death toll to exceed 5,000 by mid-April.
Thanks to reforms completed under Erdogan’s watch, Turkey provides universal health coverage through an integrated family medicine model that offers significantly better access for patients than the U.S. system, in which 45 percent of adults are uninsured or underinsured. But despite having one of the best health care systems in its immediate neighborhood, Turkey still lags all countries in the Organization for Economic Cooperation and Development in doctors per capita. Italy, for example, has more than twice the doctors and three times the nurses per capita that Turkey has.
Making matters worse, since the country’s abortive coup of July 2016, the Turkish government has purged and blacklisted more than 150,000 civil servants, including some 15,000 health care professionals, even forcing the country’s top coronavirus expert, Mustafa Ulasli, to sit unemployed on the sidelines for his alleged links to an opaque religious network widely believed in Turkey to have orchestrated the failed coup attempt.
On March 23, Turkey’s main opposition leader, Kemal Kilicdaroglu, announced a 13-article package of proposals, calling for the reinstatement of purged health care workers and reopening of military hospitals Erdogan had dismantled in August 2016 as part of his post-coup push to defang the Turkish Armed Forces and bring them under his control.
Long before the onset of the coronavirus pandemic, Turkey and its emerging market peers were already finding international capital markets less willing to fund their current account deficits. In August 2018, the price of Turkey’s credit default swaps (CDS), which insure against a default on Turkish sovereign debt, rose to its highest level since 2009. This led to an inverted curve; the cost of a one-year CDS protection had surpassed the annual cost of five-year insurance, a rare sign of intense economic distress.
The following May, the price of Turkey’s CDS again skyrocketed as capital markets started to price in a default. The country’s debt ranked as the world’s fourth-riskiest at the time after Venezuela, Argentina, and Ukraine. Since then, the plunge in currency values and foreign revenues, triggered by the coronavirus pandemic, has deepened the crisis in all emerging economies, which are now scrambling to avoid default.
Surprisingly, Turkey’s finance and treasury minister, Berat Albayrak—who is married to Erdogan’s daughter and shares his father-in-law’s unorthodox economic approach—appears irrationally exuberant. On March 19, he stated that he had no concerns about meeting the government’s growth, budget, and inflation targets for 2020, predicting 5 percent growth for the year. Turkey’s central bank, which Erdogan stripped first of its autonomy and credibility and then of a big chunk of its legal reserves last July, similarly downplayed the pandemic’s threat, declaring, “With its dynamic structure, the Turkish economy will be among those that will get over this process with minimum damage and in a short time.”
Ankara, however, is not prepared for the inevitable economic slowdown. The lira has depreciated over 14 percent against the U.S. dollar this year to date, putting further strain on Turkey’s overleveraged nonfinancial companies that have foreign exchange liabilities totaling some $300 billion (one-third in short-term loans). As the country’s struggling businesses continue to experience shrinking revenues, the lira equivalent of servicing their foreign exchange liabilities has grown 20 percent over the last 12 months.
Add to that the nosedive in central bank’s net foreign currency reserves to a meager $1.5 billion, which the bank has tried to hide behind short-term swap operations with local banks. Since January 2019, Albayrak appears to have burned through $65 billion of the bank’s reserves to shore up the faltering lira. Nevertheless, analysts at Japan’s MUFG Bank forecast the lira to fall another 18 percent within a year, bringing the exchange rate to a record low 8 lira to the dollar, compared with 3 lira to the dollar in September 2016.
A recent Morgan Stanley study showed that in a stress scenario among emerging economies, the percentage of foreign exchange reserves to external financing needs was the lowest in Turkey, lagging behind South Africa, Argentina, and Pakistan, making Ankara heavily “reliant on further foreign borrowing in hostile markets.”
Turkey’s empty coffers are one of the reasons Erdogan could unveil only an anemic $15 billion stimulus plan on March 18. Ankara’s package amounts to 1.5 percent of GDP, dwarfed by the ratio of other packages to the respective GDPs of issuing states, including the United States (11 percent), Germany (4.9 percent), and Brazil (3.5 percent).
Turkey’s business community, in a rare sign of courage, has already petitioned Erdogan for additional fiscal stimulus. Having little firepower left, the Turkish president even resorted to a “donation campaign,” asking citizens to help stem the economic contagion, pledging himself to donate seven months’ salary. There are now reports that civil servants are being forced to give a designated portion of their salaries, which they are unlikely to refuse given the risk of dismissal without due process in Erdogan’s next round of purges.
To make matters worse, Turkey’s dual financial and public health crisis has brought out the Turkish president’s worst survival instincts. Last month, Steven A. Cook warned in a Foreign Policy piece that Erdogan “is a man more worried about taking the blame for the illnesses and deaths to come than the health and safety of his people.”
Since the onset of the pandemic, Turkey’s ubiquitous president has disappeared from the airwaves, leaving his health minister to communicate with the public—likely setting the stage for the minister to ultimately take the fall. Meanwhile, increasingly worried about the strong performances of the mayors of the opposition-run Ankara and Istanbul municipalities, Erdogan has slammed them for operating unauthorized campaigns raising donations and blocked the municipal accounts earmarked for assistance to coronavirus-stricken residents of those metropolises.
While he ducks the blame for the death toll, the Turkish president clearly sees the coronavirus pandemic as yet another opportunity to further consolidate power by introducing draconian measures. As of March 25, Turkish authorities have arrested more than 400 people for their social media posts about the coronavirus for “attempting to stir unrest.” As of April 5, Turkish prosecutors have interrogated eight journalists over their COVID-19 reporting.
Erdogan even filed a criminal complaint on April 7 against a Fox TV anchorman for “spreading lies and manipulating the public on social media,” after he had suggested in a tweet that the government might also require all bank account holders to provide contributions to the campaign against the coronavirus. Meanwhile, the Turkish president is also busy dismissing and detaining elected mayors of the pro-Kurdish Peoples’ Democratic Party (HDP), appointing eight more of his hand-picked trustees to replace elected officials. Erdogan’s track record from earlier political and economic crises promises more crackdowns to come.
As Turkey and the world face an unprecedented financial and public health challenge, Erdogan’s biggest mistake is conflating the COVID-19 pandemic with earlier annoyances that he could sweep under the rug with heavy-handed methods and a dose of polarizing rhetoric. During an unparalleled crisis that calls for solidarity and trust within and among nations, unless the Turkish president stops doubling down on past mistakes, calamitous financial and public health crises await Turkey—and each of them will be contagious for the country’s trading partners near and far.
Aykan Erdemir is the senior director of the Turkey program at the Foundation for Defense of Democracies. He was a member of the Turkish parliament representing the Republican People’s Party (CHP) from 2011 to 2015. Twitter: @aykan_erdemir John A. Lechner is a graduate student at Georgetown University’s School of Foreign Service. Twitter: @JohnLechner1